NatWest Group plc
Annual Report and Accounts 2020
We champion potential,
helping people, families and
businesses to thrive.
natwestgroup.com
Inside our 2020 Annual Report and Accounts
Strategic report
2020 highlights and progress
A relationship bank for a digital world
2020 financial performance
2020 progress against our
four strategic priorities
Chairman’s statement
Group Chief Executive Officer’s statement
Building a purpose-led bank
Building a purpose-led bank
Our strategy
Supporting our customers, colleagues and
communities throughout the UK and Ireland
Our operating environment
Outlook
How we create value
Our business performance
Our stakeholders
Stakeholder engagement
Section 172(1) statement
Our customers
Our colleagues
Risk management
Risk overview
Top and emerging risks
Governance and compliance
Governance at a glance
Non-financial information statement
Viability statement
Climate-related disclosures
Business review
Governance
Risk and capital management
Financial statements
Additional information
Country by country report
Risk factors
Shareholder information
04
05
06
08
12
16
18
22
24
28
30
33
46
48
53
57
62
64
65
66
67
69
84
97
157
246
343
345
363
Approval of Strategic Report
The Strategic Report for the year ended 31 December
2020 set out on pages 4 to 83 was approved by the Board
of directors on 19 February 2021.
By order of the Board
Company Secretary
Jan Cargill
19 February 2021
Chairman
Howard Davies
Executive directors
Alison Rose (Group CEO)
Katie Murray (Group CFO)
Non-executive
directors
Frank Dangeard
Yasmin Jetha
Patrick Flynn
Mike Rogers
Morten Friis
Mark Seligman
Robert Gillespie
Lena Wilson
02
Our 2020 reporting suite
Our 2020
reporting suite.
Our 2020 reporting suite brings together NatWest Group’s
financial, non-financial and risk performance for the year.
The reports are designed primarily to meet the expectations
of our investors and debt holders (including green, social and
sustainability (GSS) bonds), as well as regulators, ESG conscious
investors and our wider stakeholders, including customers,
colleagues and society more broadly. The main reports within
this suite and their focus areas are detailed below.
Reports
All contained within
this document
Strategic report and business review
An overview of our business, our 2020 financial and non-financial performance and progress in terms
of Our Purpose-led strategy to champion potential, helping people, families and businesses to thrive.
Governance and remuneration report
A detailed review of our corporate governance and remuneration, including the Report of the directors
and annual report on remuneration.
Risk and capital management report
A detailed overview of the management of key risks relating to our business operations
and disclosures on our capital, liquidity and funding position.
Financial statements
Our financial statements and related notes, including the independent auditor's report.
Company announcement and Financial supplement
Our latest company information including our financial performance for the year with a focus on key metrics
and measurement. The financial supplement provides key financial performance data for the nine quarters
ended 31 December 2020.
Climate-related disclosures report
Details our progress in 2020 on our climate ambitions including an overview of our approach to climate
related strategy, scenario analysis, risk management and metrics.
ESG supplement
Provides an overview of Our Purpose in action and key environmental, social and governance matters including
progress in 2020. Due to be published in March 2021.
Pillar 3 report
Focuses on our regulatory reporting requirements and provides an explanation of our risk profile, including
our capital adequacy, risk appetite and risk management.
natwestgroup.com
In addition to the reports above, we provide key subsidiary reporting, quarterly results, other periodic and archived
reporting. Other stakeholder resources are also provided including investor slides, presentations and factbooks and
reporting in relation to our GSS bond issuance.
03
2020 highlights and progress
A relationship bank
for a digital world.
We champion potential; breaking
down barriers and building financial
confidence so the 19 million people,
NatWest Group is a
families and businesses we serve in
relationship bank
communities throughout the UK and
for a digital world.
Ireland can rebuild and thrive. If our
customers succeed, so will we.
We champion potential; breaking down barriers and building financial
confidence so the 19 million people, families and businesses we serve
in communities throughout the UK and Ireland can rebuild and thrive.
If our customers succeed, so will we.
W
Our Strategy
Our strategy is to deliver on
Our Purpose and drive sustainable
returns to shareholders through
four strategic priorities.
Our Strategy
Our strategy is to deliver on Our
Purpose and drive sustainable
returns to shareholders through
four strategic priorities.
NatWest Group is the largest business
and commercial bank in the UK, with a
leading retail business. We are the biggest
supporter of the business sector – banking around
1 in 4 businesses across the UK and Ireland, from
start-ups to multi-nationals.
We are closely connected to our 19 million customers
across the UK and Ireland; through a comprehensive
range of banking and financial services, and a
strong local and regional footprint. This connection
to customers and communities builds our trust and
knowledge; enabling us to support our customers
effectively, throughout their lives as their financial
needs and priorities evolve.
We champion their potential, by helping to identify and
break down the barriers they may be facing. During
this period of economic uncertainty and disruption, we
have stepped up to support our customers in faster,
more personal and digitally-enabled ways. Guided by
our purpose and strategy, we have the proven intent
and means to deepen our customer relationships, grow
our business, balance the needs of all our stakeholders,
and drive long-term, sustainable returns for our
shareholders.
In an ever-changing world it has never been more
important to stand for something. Our Purpose is our
North Star – it is the cornerstone of everything we do.
It recognises that our business is made up of a network
of relationships with multiple stakeholders with
different interests. We know relationships run deeper
than transactions and that we need to consider the
interests of all our stakeholders. In 2020, Our Purpose
could be seen in action, as we stepped up quickly to
put in place extraordinary measures to support our
customers, colleagues and communities through the
COVID-19 pandemic.
Areas of Focus
There are three
focus areas of Our
Purpose where we can
make a meaningful
contribution to our
customers, colleagues
and communities.
DOING THE RIGHT THING
S
E
R
V
I
N
G
R
E
H
T
E
G
O
G T
KIN
R
O
Our Purpose
We champion potential, helping
people, families and businesses
to thrive
C
U
S
T
O
M
E
R
S
M
R
E
G-T
N
O
G L
KIN
HIN
T
Supporting
customers at
every stage of
their lives
Powered by
innovation and
partnerships
Climate
Leading the climate challenge
Simple to
deal with
Sharpened
capital
allocation
Learning
Building financial
capability
Areas of Focus
There are three focus areas of
Our Purpose where we can make
a meaningful contribution to our
customers, colleagues and
communities.
Enterprise
Removing barriers to
enterprise
There are three focus areas of Our Purpose where we can
make a meaningful contribution to our customers, colleagues
and communities: climate, enterprise and learning. We will
lead the fight against climate change by playing an active role
in the transition to a low-carbon economy. As the champion
of businesses in the UK and Ireland we will remove barriers to
enterprise and help the economy build back better. And we will
build financial capability by helping those who want to take control
of their finances and their futures to make the most of their money.
The strength of our culture underpins everything we do.
We deliver on our promises and live by our values as one bank;
serving customers, working together, doing the right thing and
thinking long-term.
Our strategy is to deliver on Our Purpose and drive sustainable
returns to shareholders through four strategic priorities. We will
support our customers at every stage of their lives by being more
relevant to them and by building deeper relationships as we evolve
our propositions to meet their needs throughout their lives. We will
be much simpler as a bank and much simpler to deal with for our
customers, through a focus on great customer service technology
and improving customer journeys. We will be powered by
innovation and partnerships by using new technology and digital
expertise to deliver an excellent customer experience – harnessing
our internal knowledge and experience and partnering with
leading external organisations around the world. We will allocate
our capital better to drive growth and optimise returns from a safe
and secure base.
We will deliver these priorities from a strong balance sheet and
capital generative businesses, which give us the necessary
flexibility to navigate an uncertain outlook, to support our
customers, and deliver sustainable returns to shareholders.
04
2020 financial
performance.
2020 highlights and progress
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
The past year presented some extraordinary challenges for
our customers, colleagues and communities. We provided
exceptional levels of support to those who needed it, including
the approval of over £14 billion of lending under UK Government
schemes, demonstrating that we have truly put Our Purpose
at the heart of this business. Being purpose-led isn’t just the
right thing to do, it has a powerful commercial imperative and is
fundamental to building sustainable value in our business.
Despite reporting a loss for the year, NatWest Group delivered a resilient underlying performance in
a challenging operating environment. The bank continued to grow in key areas such as mortgages
and commercial lending and our balance sheet remains strong, with one of the highest capital ratios
amongst our UK and European peers. We have today announced our intention to pay a final dividend
whilst reaffirming our commitment to regular capital returns for shareholders in the future.
We cannot be certain of the long-term impact of the pandemic. But we can be certain that our bank
will continue to support those who need it most as we build back better. By championing potential
and helping people, families and businesses to rebuild and thrive, we will succeed together.
Alison Rose
Group Chief
Executive Officer
Financial performance
Operating profit before
impairment losses
Operating (loss)/profit
before tax
£m
(Loss)/profit attributable to
ordinary shareholders
£m
2020
2019
2018
2,891
2020
4,928
2019
3,757
2018
(351)
2020
4,232
3,359
2019
2018
Total income
Operating expenses
Expected credit losses
£m
£m
2020
2019
2018
10,796
2020
14,253
2019
13,402
2018
(7,905)
2020
(9,325)
2019
(9,645)
2018
£m
(753)
3,133
1,622
£m
(3,242)
(696)
(398)
Challenging conditions resulted in an operating loss before tax of £351 million. Expected credit losses
of £3,242 million, 88 basis points of gross customer loans, mainly reflects charges taken in the first
half of 2020 due to the uncertain economic environment. The level of Stage 3 defaults remains low,
reflecting the impact of government support.
Total income decreased by £3,457 million, or 24.3%, compared with 2019. Excluding notable items
(2020 – £(384) million; 2019 – £2,115 million) income decreased by £958 million, or 7.9%, due to
reductions across the retail and commercial businesses, partially offset by higher NatWest Markets
income reflecting increased customer activity as the market reacted to the spread of the COVID-19 virus.
Operating expenses excluding litigation and conduct costs, strategic costs and operating lease
depreciation (2020 - £1,271 million; 2019 - £2,414 million), decreased by £277 million, ahead of
our £250 million target for the year, reflecting the continued transition from physical to digital, the
optimisation of our property footprint, lower investment spend and reductions in NatWest Markets.
05
2020 highlights and progress
2020 progress against our
four strategic priorities.
Simple to deal with
Through simplification and driving efficiency, we will be much simpler as a bank, improving both customer
experience and colleague engagement. Customer journeys account for c.30% of our cost base, simplifying
and automating customer journeys makes us simpler to deal with and reduces our operating costs.
Retail Banking
58%
Commercial Banking
67%
Operating expenses
£277m
of our customers exclusively use
digital channels to interact with us.
of Commercial Banking sales via
digital channels (excluding BBLS).
reduction in operating expenses,
against a target of £250 million in 2020.
2019: 46%
2019: 52%
2019: £310m 2018: £278m
Artificial intelligence
Net trust scores
Video banking
9,000
9.0m
interactions per week by the end of
2020 compared with less than 100 at
the start of the year.
Cora conversations of which 40%
required no human intervention.
2019: 5.4m
69 44
NatWest
Royal Bank of Scotland
NatWest and and Royal Bank of
Scotland improved, but targets missed
by 1 point and 17 points respectively.
The COVID-19 pandemic has significantly increased the pace of digital adoption,
providing the platform for income growth across all channels.
2019: 62
39
Colleague engagement
94%
of colleagues feel that NatWest
Group supports diversity and
inclusion in the workplace.
90%
colleague
engagement score.
2019: 93% 2018: 92%
2019: 87% 2018: 86%
93%
of colleagues feel that our
purpose and values are
meaningful to them.
Engaging our colleagues is critical to delivering Our Purpose. By championing the potential of our colleagues we are better
placed to help people, families and businesses to thrive.
Powered by innovation and partnerships
By harnessing our internal knowledge and partnering with leading external organisations,
we will use new technology and digital expertise to deliver an excellent customer experience.
Payit
Mettle
We have created a strong
culture of innovation with the
development of customer
propositions such as Payit,
our new payment platform
launched in June 2020.
We have enhanced our propositions
for our small business customers
with our digital only bank Mettle and
online offerings such as FreeAgent –
our free online accounting software
made available through Mettle.
BlackRock
Established new
relationship with BlackRock
to support our investment
management processing
activity, enabling savings to
be passed onto our clients.
BNP Paribas
Established new
relationship for
the execution and
clearing of listed
derivatives.
06
2020 highlights and progress
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Sharpened capital allocation
We will use and allocate our capital better to drive growth
and optimise returns from a safe and secure base.
CET1 ratio
Liquidity coverage ratio
Return on tangible equity
2020
2019
2018
%
18.5
16.2
16.2
2020
2019
2018
Total risk-weighted assets
£bn
NatWest Markets
risk-weighted assets
2020
2019
2018
170.3
2020
179.2
2019
188.7
2018
%
165%
152%
158%
£bn
26.9
37.9
44.9
The CET1 ratio of 18.5%, was 230 basis points higher than 2019, including c.100 basis points
related to IFRS 9 transitional relief. The liquidity coverage ratio (LCR) of 165%, representing
£72.1 billion headroom above 100%, increased by 13 percentage points in comparison
to 2019. RWAs decreased by £8.9 billion in comparison to 2019, including a £11.0 billion
reduction in NatWest Markets to £26.9 billion, partially offset by volume growth across the
retail and commercial businesses with minimal levels of procyclical credit risk inflation.
%
(2.4)
9.4
4.8
pence
3
14
13
2020
2019
2018
Dividend per share
Paid and proposed
2020
2019 (1)
2018
Note:
(1) Excludes 2019 final dividend per share of 3p
and special dividend per share of 5p proposed
but not paid due to restrictions placed on UK
banks by the PRA.
Supporting customers at every stage of their lives
Building deeper relationships and evolving our propositions to meet the
needs of our customers throughout their lives.
£328.8bn
£14.1bn
of net lending in our retail and
commercial businesses, an increase
of £20.9 billion.
approved through government
schemes of which £12.9 billion
was drawndown.
258,000
customers helped in 2020 with a
mortgage repayment holiday.
2019: £307.9bn 2018: £296.7bn
Supporting our customers and their financial health through COVID-19.
£31.5bn
gross new mortgage lending in
Retail Banking, a flow share of 13.0%,
up from 12.4% in 2019.
2019: £33.3bn 2018: £30.4bn
£5.0m
cash delivered to customers
in vulnerable situations.
74,000
payment holidays on business
customer accounts.
07
2020 highlights and progress
Chairman’s
statement
Dear shareholders,
It is fair to say that 2020 was a year like no other. Politicians, regulators and
industry leaders around the globe had to come together and find urgent
solutions to a series of rapidly evolving public health and socio-economic
challenges caused by the COVID-19 pandemic. And the United Kingdom left
the European Union after nearly 50 years of membership.
Effective oversight is especially critical at times like these. At NatWest
Group, we quickly established a rhythm of weekly, virtual Board meetings
to receive updates from the management team on our response to
COVID-19 and how the implementation of Our Purpose was helping to
meet the needs of customers.
As a Board, we spent a considerable amount of time working to support
Alison and her leadership team in the development of the new purpose for
NatWest Group that was set out in February last year. Ultimately, however,
we will be judged on our actions, not our words. And all of our leaders have
measurable objectives specifically mapped to our three key areas of focus.
By embedding Our Purpose at the core of our business, we have signalled
our intent to deliver not only a sustainable financial performance for
shareholders but to make a positive contribution to society.
Group name change
Last year also saw us change our group name from The Royal Bank of
Scotland Group plc to NatWest Group plc. The Board decided that it was the
right time to align our parent company name with the brand under which the
majority of our business is delivered.
08
Howard Davies
Chairman
2020
was a year like no other. Politicians,
regulators and industry leaders
around the globe had to come
together and find urgent solutions to a
series of rapidly evolving public health
and socio-economic challenges.
2020 highlights and progress
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
We have signalled our intent to deliver not
only a sustainable financial performance
for shareholders but to make a positive
contribution to society.
Customers have seen no change to our products and
services as a result of our name change and continue to
be served through the brands they recognise, including
NatWest in England and Wales, Royal Bank of Scotland
in Scotland and Ulster Bank in Ireland. And while what we
are called is important, it is how we do business that will
define us.
Outlook
Throughout 2020, the UK Government and the Bank of
England took unprecedented steps in both monetary and
fiscal policy. Substantial government-backed interventions
kept entire industries afloat and millions of people in work.
These measures were generally welcome and necessary
and there has been positive progress in developing and
rolling out vaccines. But a return to anything approaching
normality will take some time and be very different to what
went before.
At the last minute, the trade agreement with the European
Union avoided a disorderly exit. But there is still a lot of
work to do and significant uncertainty persists, particularly
in areas such as financial services. It remains to be seen
how cross-border entities will be regulated and what
level of regulatory equivalence between the UK and EU
will be secured.
As a largely UK-focused bank, the direct impact of Brexit
is not as significant for NatWest Group as it is for banks
with larger EU or markets operations. We are as prepared
as we can be through our well-capitalised and fully
operational entities in the EU. Any wider economic impacts
will, however, clearly have implications for the bank’s
performance. Our focus continues to be on providing
support for our customers as the new UK-EU trading
relationship develops.
Financial performance
It is always disappointing to report a loss, even if our
performance in 2020 was largely a reflection of the impact
that COVID-19 had on our customers and the economy
and the fact that we took a large provision under IFRS9
to cover potential future loan losses as the full impact of
the pandemic becomes clearer. We also saw a significant
decline in share prices across the UK banking sector,
including our own. Again, this was to be expected given
the prevailing economic conditions and there was a degree
of positive momentum towards the end of the year as a
Brexit deal was reached and a vaccination programme
put in place.
The persistently low interest rate environment and ongoing
COVID-19 restrictions will continue to challenge financial
performance amongst all UK banks for the foreseeable
future. However, despite the tough operating environment,
the bank is making good progress against its strategy. We
continued to grow in key areas of focus and our strong
levels of capital and liquidity mean we are well positioned to
navigate the ongoing uncertainty.
In spite of numerous lockdowns, 2020 was an extremely
busy period for many of our colleagues, most of whom were
working at home for much of the year. We received over
100,000 applications for the government-backed Bounce
Back Loan Scheme in the five days following its launch.
And, by the end of 2020, 22% of our mortgage customers
had taken a mortgage repayment holiday at some point
during the year. We also kept almost all of our branches
open. For our colleagues, pay was protected until the end
of September 2020, regardless of the need to take time off
for COVID-19 related illness, dependants care, isolation or
childcare. But our remuneration needs to reflect the difficult
economic circumstances. Most of our colleagues do not
receive annual bonuses, but for those who are eligible the
overall pool has been cut back sharply by around a third.
Sustainable returns
In March 2020, following a formal request from the
Prudential Regulation Authority (PRA), and in line with
all our UK peers, the Board undertook not to make any
dividend payments in 2020. We also undertook not to set
out any distribution plans or to take part in a share buyback
during the course of the year. We understand the actions
taken by the regulator given the exceptional circumstances.
However, these restrictions were clearly a disappointment
for many shareholders and impacted the investability and
share price performance of all UK banks.
In December 2020, the PRA made the welcome
announcement that it was lifting the restrictions on capital
returns, subject to certain sensible guardrails. Following
09
2020 highlights and progress
Against this extraordinary backdrop, we provided
exceptional levels of support to the customers,
colleagues and communities we serve whilst making
strong progress against our strategic priorities and
protecting the business in the face of significant and
ongoing uncertainty.
Conclusion
We could not have imagined that Our Purpose-led
approach would be put to the test so soon after it was
announced in February last year. In the space of just a
few weeks, the UK was in lockdown. Large parts of our
economy came to a complete standstill and many of our
customers urgently needed our help.
Against this extraordinary backdrop, we provided
exceptional levels of support to the customers, colleagues
and communities we serve whilst making strong progress
against our strategic priorities and protecting the business
in the face of significant and ongoing uncertainty.
We are grateful to Alison Rose and her senior team for the
leadership and energy they have displayed in remarkably
challenging circumstances. Looking forward, the Board
firmly believes that we have a well-balanced leadership
team in place with the necessary experience and expertise
to deliver our objectives. By championing potential, we
will help people, families and businesses to rebuild and
thrive, we will create a bank that has a positive impact on
society and we will drive sustainable, long-term returns
for our shareholders.
this decision, and having considered a range of factors,
we have announced a final dividend of 3 pence per share
and, subject to permission from the regulators, we plan to
distribute at least £800 million per annum through to 2023
through a combination of ordinary and special dividends,
maintaining our 40% pay-out ratio for ordinary dividends.
With a CET1 ratio of 18.5% we are operating well above our
target ratio of 13 to 14%. In addition to dividends, this gives
us the capacity to participate in directed buy backs from
the government for up to 4.99% of issued share capital a
year. Any buyback of shares will be at the discretion of HM
Treasury, but the Board continues to believe that it would
be a positive use of our excess capital.
Our intention remains to return capital to shareholders or
pursue other options that create value and we have now
set out a clear guidepath to reach our target CET1 ratio of
13 to 14% by 2023.
Board changes and stakeholder engagement
During the course of last year, there were a number of
changes to the membership of the Board. Baroness Noakes
DBE stepped down as a non-executive director in July 2020,
with Morten Friis succeeding her as Chairman of the Group
Board Risk Committee.
Alison Davis stepped down as a non-executive director in
March 2020. Yasmin Jetha was re-appointed as a non-
executive director on 1 April 2020 and succeeded Alison
as Chairman of the Technology and Innovation Committee
as well as becoming a member of the Group Sustainable
Banking Committee.
I would like to thank Baroness Noakes and Alison Davis
for their outstanding contributions to the Board over
many years. I would also like to welcome Yasmin back
to the Board and thank all of my colleagues for their
continued dedication in the face of extremely challenging
circumstances.
Improving the quality and frequency of engagement with
all our stakeholders, including our shareholders, remains
a priority for the Board. During the course of last year
we held virtual events for retail shareholders and Board
sessions with institutional shareholders. A number of Board
members also met colleagues in Colleague Advisory
Panel meetings, chaired by Board Member, Lena Wilson,
to hear their views directly.
Focus
We continue to grow in key areas of focus
and our strong levels of capital and liquidity
mean we are well positioned to navigate the
ongoing uncertainty.
10
2020 highlights and progress
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Supporting
female
entrepreneurs
As the leading bank for UK business, we know
that we have a crucial role to play in removing
the barriers that women face when starting and
scaling up their businesses.
Published in 2019, the Rose Review, led by our CEO Alison Rose, demonstrated that
removing these barriers could add £250 billion to the UK economy.
We have over 600 Women in Business Specialists throughout the UK and are committed
to using our expertise to support women to start up and grow their businesses. In 2020
we announced £1 billion of Female Entrepreneurship Funding, all of this funding has
been allocated and we recently announced a further £1 billion in funding.
Since 2018, 43% of entrepreneurs on our free NatWest Accelerator programme have
identified as female, and we have teamed up with Be The Business to pilot the Rose
Review Female Entrepreneurs Mentoring Programme, a free mentoring service for
female entrepreneurs in Leeds and the West of England, with plans to expand in 2021.
In response to COVID-19 we pivoted Dream Bigger, our fully-funded programme focused
on developing transferable entrepreneurial skills in 16-18 year old females across the UK,
to digital delivery. In 2020, the programme supported over 15,000 16-18 year old female
entrepreneurs, working with Microsoft, Facebook and Young Enterprise Scotland.
In our Experts in Residence partnership with 38 Local Enterprise Partnerships (LEPs), a
NatWest expert spends up to 7 hours per week supporting female and diverse business
owners. The programme sees us work alongside partners such as Amazon, Facebook,
Microsoft and LinkedIn, with activity tailored to the needs of each LEP.
11
2020 highlights and progress
Group Chief
Executive Officer’s
statement
Dear shareholders,
The past year presented some extraordinary challenges for our customers,
colleagues and communities in the face of an ongoing global health crisis that
led to a widespread economic crisis.
Alison Rose
Group Chief Executive Officer
Throughout the course of the year, we responded at pace, providing
exceptional levels of support to those who needed it and demonstrating
that we have truly put Our Purpose at the heart of this business. In the face
of such trying circumstances, I am proud of the resilience, empathy and
kindness exhibited by so many of my colleagues across the bank.
We champion potential; breaking down barriers and building financial
confidence so the 19 million people, families and businesses we serve in
communities up and down the country can rebuild and thrive.
But COVID-19 has created opportunities as well as challenges, and it has
accelerated a number of underlying trends in customer behaviour, our ways
of working and the future shape of our economy.
We look forward with renewed hope and positivity and although we cannot
be certain of the long-term impact of the pandemic, this bank will continue
to serve our customers and support those who need it most. We will succeed
together and, as a result, NatWest Group will drive sustainable, long-term
returns for our shareholders.
Financial performance
Despite reporting a loss for the year, NatWest Group delivered a resilient
underlying performance through the strength of our core franchises and
brands in a challenging operating environment.
Our attributable loss of £753 million for 2020 reflects an impairment charge
of £3.2 billion, a significant proportion of this impairment charge relates to
potential future loan losses under IFRS 9. We continue to experience relatively
12
Support
Throughout the course of the year, we
provided exceptional levels of support to
those who needed it and demonstrated
that we have truly put Our Purpose at
the heart of this business.
2020 highlights and progress
Our robust balance sheet and sector-leading
capital strength, underpinned by a resilient
business with strong capacity for growth, gives us
the flexibility to navigate the uncertain outlook,
support our customers and deliver sustainable
returns to shareholders.
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
low levels of actual default in our lending book, which is
well diversified with limited exposure to unsecured loans.
Before impairments, NatWest Group made an operating
profit of £2.9 billion.
At 18.5% our CET1 ratio – the key measure of financial
strength – is one of the highest amongst our UK and
European peers. This capital strength gives us the flexibility
to navigate the continuing uncertainty, return capital
to shareholders and consider options for creating
shareholder value.
In the face of extreme disruption, we made determined
progress against the strategy we set out in February 2020
and surpassed our financial targets. We are building a
relationship bank for a digital world; a bank that supports
customers at every stage of their lives, that is simple to deal
with and that is powered by innovation and partnerships,
with far sharper capital allocation.
We have significant capacity to grow, with activity
levels increasing across both our retail and commercial
businesses. Net lending grew 7% in 2020, while our gross
new mortgage lending represented a share of around 13%,
taking our stock share to almost 11%.
In December 2020, we supplemented the organic growth
we continue to achieve in mortgages with the acquisition of
a £3 billion mortgage book from Metro Bank plc. This was
our first significant acquisition since the financial crisis and
represented a positive use of our strong capital position in a
key area of focus.
Championing potential through COVID-19
Colleagues
The safety and wellbeing of our colleagues has been,
and remains, a priority for the bank throughout the
pandemic. We introduced resources to maintain and
enhance the physical and mental health of our colleagues,
providing access to virtual GPs, the SilverCloud wellbeing
platform and free physiotherapy advice. For almost 10,000
keyworker colleagues who have remained on the frontline,
all of our offices and branches were made COVID-secure.
Around 50,000 colleagues have been working from home
since March last year, supported by the delivery of 37,000
tech bundles and over 25,000 chairs and desks. The
timing of a phased return to our offices will be led by UK
Government guidance and factors such as the progress
of vaccinations.
We continue to create opportunities for new talent from a
range of backgrounds to join our organisation, including
through our Social Mobility Apprenticeship Programme
– one of the first of its kind in the UK – as well as providing
existing colleagues with easy access to the very best
learning through the NatWest Group Learning Academy.
Customers
From the start of the pandemic, it was clear that this was
not business as usual. By pivoting our business at pace
and collaborating with politicians, regulators and industry
leaders, we were able to continue to serve our customers in
the face of unprecedented demand.
In total, we approved around £14 billion of loans for
business customers under the different government
schemes in 2020 and provided 258,000 mortgage holidays.
We delivered £5.0 million of cash securely to our customers
in vulnerable situations and made almost 480,000 calls to
check up on them, whilst also introducing a Companion
Card that allowed trusted volunteers to pay for their
essential goods.
Thanks to the extraordinary dedication of our colleagues,
we have remained on the high street, supporting our
customers and consistently keeping more than 95% of our
branches open.
We have more than 800 branches and 16,000 physical
points of presence, including our ATM network and
our relationship with the Post Office. These remain an
important part of how we deliver services to our customers.
The pandemic has also accelerated trends in how our
customers want to bank with us. In particular, we have
seen a rapid increase in digital adoption. We now have 9.4
million active digital users and 7.7 million active users of
our mobile app. 58% of our retail customer base in the UK
now exclusively uses digital channels to interact with us, an
increase of 12% compared with 2019.
For business customers, we were able to extend over £8
billion of Bounce Back Loans by creating an end to end
digital application process within the space of a week.
As we responded to COVID-19, we also migrated our
enterprise support initiatives to be delivered digitally. Our
12 entrepreneur accelerator hubs held over 1,000 virtual
events with 45,782 attendees since the start of lockdown.
13
2020 highlights and progress
Communities
As a relationship bank that sits at the heart of communities
up and down the country, we have a responsibility to
provide support to the most vulnerable people in society.
flagship MoneySense financial education programme has
reached more than nine million children in 1 in 3 UK schools
and last year we reached more than 2.9 million people
though our various financial capability interactions.
Leveraging existing relationships, part of our Gogarburn
HQ was transformed into a food bank distribution hub
for the Social Bite, Trussell Trust and Cyrenians charities.
We’ve supported these charities to produce over one million
meals for those in need since the start of March 2020 and
we became a vital distribution network for items such
as 240,000 books and education packs, 250,000 items
of essential clothing and over 200,000 items of toiletries,
masks, hand sanitisers and snacks. Meanwhile, the roof
garden at our Coutts office on The Strand donated produce
to the Felix Project which delivers surplus food to food
banks, schools and charities throughout London.
The bank also raised £10 million by match-funding
customer donations to the National Emergencies Trust
and established a £5 million fund with the Prince’s Trust to
help young entrepreneurs during the crisis. Working with
SafeLives, we launched a review into how we can better
support customers who have been victims of economic
abuse and acquired coercive debt and announced a
£1 million fund to support survivors of economic and
domestic abuse.
Our Purpose
The COVID-19 pandemic has not distracted us from
Our Purpose; we champion potential, helping people,
families and businesses to thrive. Nor has it distracted us
from the three key areas of focus we set out in February
2020. If anything, it has made them even more important.
Our Purpose also has a powerful commercial imperative.
If our customers succeed, so will we.
By removing barriers, building financial capability,
championing equality and helping to tackle climate change,
we are determined to pave the way for a better future.
Removing barriers to enterprise
We are already the largest supporter of UK business,
serving around 1 in 4 UK businesses. However, we know
that setting up and running a business is harder than
it should be for under-represented groups, including
for female and Black, Asian and Minority Ethnic-led
businesses. We want to remove these barriers.
In 2020, as a result of the pandemic, we launched an SME
response strategy that supported four million of our current
customers to help them survive and thrive through the crisis.
At the start of last year, we also created a £1 billion fund
aligned to our focus on supporting female entrepreneurs.
During the course of 2020, all of this fund was allocated,
leading us to announce an additional £1 billion in funding
to help support female-led businesses recover from the
disruption caused by coronavirus.
Building financial capability
Developing good habits can help to transform people’s
relationships with money, and this has never been more
important given the economic disruption we continue to
face. We helped 600,000 (1) customers to start saving with
us in 2020, with a view to helping two million by 2023.
Building financial confidence and capability is especially
important for young people. Over the last 26 years, our
We also launched Island Saver, the world’s first financial
education mobile, console and PC game for children. With
more than 2.3 million downloads, it has helped us to engage
children from a young age in the importance of managing
their money.
Leading the climate challenge
Climate change is the greatest challenge facing the planet.
Tackling it requires collaboration across governments,
industries and society.
We are determined to play a leading role in driving positive
change. In November 2020, we announced that NatWest
Group will be one of the Principal Partners and banking
sponsor of the 26th UN Climate Change Conference of the
Parties (COP26), taking place in Glasgow later this year.
There is much more we can do, both to get our own house
in order and to help our customers in the transition to a
low-carbon economy. We have set ourselves the ambitious
goals of at least halving the climate impact of our financing
by 2030 and making our own operations climate positive by
2025, having made them net carbon zero in 2020.
As a founding signatory to the UN Principles for
Responsible Banking we are committed to aligning
our strategy with the 2015 Paris Agreement and UN
Sustainable Development Goals.
In 2020, we helped our business customers with £12 billion
of new climate and sustainable financing and funding. We
also launched our first ever Green Mortgage in October
2020 and are supporting the drive to decarbonise the UK
transportation sector through the Future Mobility Group.
Lord Stern was appointed as an independent adviser to
NatWest Group to help us achieve our ambitions and James
Close as our new Director, Climate Change, to co-ordinate
and deliver our climate strategy.
Our strategy
NatWest Group will be a relationship bank for a digital
world. Our strategy is to deliver on Our Purpose and drive
sustainable returns to shareholders through our four
strategic priorities.
Supporting customers at every stage of their lives
We will be more relevant to our customers by building
deeper relationships and evolving our proposition to meet
their needs throughout their lives. We benefit from having
strong customer franchises across the business that
provide multiple growth opportunities. For example, by
bringing together our wealth businesses we can serve our
customers better by focusing on the changing financial
requirements through each stage of their lifetime.
Powered by innovation and partnerships
We invest around £1 billion each year to continuously
improve our customers’ experience by harnessing our
internal expertise and partnering with some of the most
innovative companies from around the world. We have
already created a strong culture of innovation with the
Note:
(1) Includes instances where customers had existing savings with other banks and transferred them into their NatWest Group account.
14
development of customer propositions such as Mettle.
We have also partnered with Pollinate to produce the
award-winning Tyl. And we established a new relationship
with BlackRock to support our investment management
processing activity.
Simple to deal with
We are becoming much simpler as a bank and much simpler
to deal with for our customers. As part of our One Bank
operating model, we are creating key Centres of Excellence
in areas such as climate change, fraud and financial crime
which bring together the expertise of colleagues from across
NatWest Group for the benefit of our customers. By reducing
complexity and improving efficiency, we continue to take
costs out of our operating model, delivering £277 million of
cost reductions in 2020, against our £250 million target.
Sharpened capital allocation
Our capital is a resource to be used across the bank, to
drive growth and optimise returns from a safe and secure
base. A crucial element of this plan is refocusing NatWest
Markets to serve our corporate and commercial customers
better. Risk weighted assets in NatWest Markets reduced
by £11 billion to £26.9 billion in 2020, exceeding our target
for 2020, with a further reduction to £20 billion planned
for the medium term. NatWest Markets is far more closely
aligned to the rest of NatWest Group and its market-leading
role in providing customers with access to COVID-19
Corporate Financing Facilities and to environmental, social
and governance (ESG) finance are further examples of the
strength of this franchise.
Ulster Bank RoI
In recent years, our strategy for Ulster Bank in the Republic
of Ireland has been to improve returns by growing the
business, reducing costs and resolving legacy issues.
I want to pay tribute to our colleagues who through their
commitment and dedication have helped to transform this
business. Our priority over the coming months will remain
on supporting our customers, communities and colleagues
through these difficult times.
Following an extensive review and despite the progress
that has been made, it has become clear Ulster Bank will
not be able to generate sustainable long term returns for
our shareholders. As a result, we are to begin a phased
withdrawal from the Republic of Ireland over the coming
years which will be undertaken with careful consideration
of the impact on customers and our colleagues.
Overview
Overall, we delivered well against our strategy throughout
2020. Looking ahead, we have set a number of financial
targets across a three year plan to 2023; to deliver lending
growth above market rate, to reduce costs by around 4%
each year and to operate with a CET1 capital ratio of 13%
to 14% by 2023. Taken together, our four strategic priorities
will drive sustainable, long-term returns to our shareholders
and we are targeting a return on tangible equity of 9% to
10% by 2023.
An additional priority throughout the year was to put in
place a leadership structure to deliver our strategy. As a
result, I made a number of important external appointments
including David Lindberg as CEO, Retail Banking, Jen Tippin
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
2020 highlights and progress
as Chief Transformation Officer, Nigel Prideaux as Chief
Communications Officer and Marg Jobling as Chief
Marketing Officer. Each brings considerable experience
and expertise to their respective roles and we are already
working closely together. Some of my former colleagues,
including our CEO of Retail Banking, Les Matheson, left the
bank to pursue opportunities elsewhere. I would like to
thank them for their invaluable contributions over many
years and wish them all the best for the future.
A diverse and inclusive bank
We continue to focus on building a more diverse and
inclusive organisation. At the end of 2020, 39% of the roles
in our top three leadership layers were held by female
colleagues, a 10% uplift since our targets were introduced.
2020 also brought an increased focus on racial inequality
with the tragic death of George Floyd and the rise of the
Black Lives Matter movement. Following the establishment
of a taskforce led by the co-chairs of our multicultural
network, we published a report - Banking on Racial
Equality: A Positive Roadmap for Change – looking at what
more we could do to champion the potential of colleagues,
customers and communities from Black, Asian and Minority
Ethnic backgrounds.
This built on the targets we put in place in 2018 to increase
the number of colleagues from Black, Asian and Minority
Ethnic backgrounds in our top four UK leadership layers
in the bank to 14% by 2025. We currently have 10% Black,
Asian and Minority Ethnic representation amongst our
UK senior leaders, a 2% increase since the targets were
introduced. Under our new commitments, we have
launched a separate goal to have 3% Black colleagues in
senior UK roles by 2025.
A sustainable future
Our robust balance sheet and sector-leading capital
strength, underpinned by a resilient business with strong
capacity for growth, gives us the flexibility to navigate
the uncertain outlook, support our customers and deliver
sustainable returns to shareholders.
But we can only deliver these returns through our strong
culture and values, with purpose at our core. We have
passionate, motivated and engaged colleagues, despite
all the challenges of COVID-19 and with most people
working from home for a considerable period of time: 95%
of colleagues think we’re doing a good job responding to
the pandemic and 92% are proud of our contribution to
community and society. These numbers mean a lot to me.
They give me confidence that we are building a sustainable
future for this bank.
The way we live and work is changing. And people’s
expectations of companies are changing as well. We won’t
always get everything right. But by collaborating with
others and demonstrating that we can play a positive role
in society, we will help to create a greener, fairer and more
inclusive economy for all, allowing us to deliver long-term
sustainable value for all our shareholders.
And by championing potential and helping people,
families and businesses to rebuild and thrive, we will
succeed together.
15
Building a purpose-led bank
Building a
purpose-led bank.
We will continue to champion
potential to help the people, families
and businesses we serve to recover,
rebuild and ultimately to thrive.
At NatWest Group, Our Purpose sits at the heart
of our decision making, because we know that
when our customers and communities succeed,
our economy prospers and we too succeed, driving
sustainable returns for shareholders.
As we emerge from the COVID-19 pandemic and
continue to support customers, colleagues and
communities to rebuild, our key areas of focus will
remain unchanged: removing barriers to enterprise;
building financial confidence and playing a leading
role in helping to tackle climate change.
16
NatWest Group is a
relationship bank
for a digital world.
NatWest Group is a relationship bank for
a digital world. We will be guided by Our
Purpose in all of our customer and colleague
interactions and in how we execute our
strategy. We believe we can make the
most impact for our customers, our
communities and our economy by
driving forward Our Purpose agenda
within our three areas of focus;
We champion potential; breaking down barriers and building financial
Climate, Enterprise and Learning.
confidence so the 19 million people, families and businesses we serve
in communities throughout the UK and Ireland can rebuild and thrive.
If our customers succeed, so will we.
W
R
E
H
T
E
G
O
G T
KIN
R
O
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
DOING THE RIGHT THING
Our Purpose
We champion potential, helping
people, families and businesses
to thrive
S
E
R
V
I
N
G
C
U
S
T
O
M
E
R
S
Our Strategy
Our strategy is to deliver on Our
Purpose and drive sustainable
returns to shareholders through
four strategic priorities.
Supporting
customers at
every stage of
their lives
Powered by
innovation and
partnerships
Simple to
deal with
Sharpened
capital
allocation
2020 TARGETS
Cost reduction of:
CET1 ratio:
£250 million
(2020)
13-14%
(medium – long term)
Risk Weighted Assets:
ROTE:
£185-£195bn
9-11%
(2020)
(medium – long term)
19 million
customers
In every region in
the UK and Ireland
Support 1 in 4 businesses
One Bank
working across
boundaries to
serve our
customers
M
R
E
G-T
N
O
G L
KIN
HIN
T
Climate
Leading the
climate challenge
Halve £20bn +
the climate
impact of our
financial activity
by 2030
additional funding
and financing for
climate and
sustainable
finance by 2021
Make our
operations
climate
positive
by 2025
Learning
Building financial
capability
2.5m
2m
100%
people reached each
year to improve their
financial capability
additional customers helped
to start saving by 2023
of front-line colleagues professionally
qualified within first 18 months in role
Areas of Focus
There are three focus areas of Our
Purpose where we can make
a meaningful contribution to our
customers, colleagues and
communities.
Enterprise
Removing barriers to
enterprise
Help create an additional 50,000
new businesses by 2023, inspiring
and supporting >500k people
60%
20%
75%
female-led
Black, Asian and
Minority Ethnic-led
outside London
and the
South East
*Since we set our targets in February, there has been a significant change in the macro environment and these targets will be reconsidered as part of our Full Year 2020 reporting cycle.
Becoming purpose-led
Our Values
We have put a common set of values at the heart of how
we conduct ourselves in the delivery of Our Purpose-led
strategy and strategic priorities. Our values are not new,
but capture what we do when we are at our best:
In shaping Our Purpose-led strategy, we worked closely
with A Blueprint for Better Business – an independent
charity which aims to create a better society through
better business.
Serving customers
We exist to serve customers.
We earn their trust by focusing on their needs and
delivering excellent service.
Guided by their Five Principles of a Purpose Driven
Business, which are outlined below, Our Purpose recognises
that our business is made up of a network of relationships
with multiple stakeholders with different interests.
Working together
The Five Principles
We care for each other and work best as one team.
We bring the best of ourselves to work and support one
another to realise our potential.
Doing the right thing
We do the right thing.
We take risk seriously and manage it prudently.
We prize fairness and diversity and exercise judgement
with thought and integrity.
Thinking long term
We know we succeed only when our customers and
communities succeed.
We do business in an open, direct and sustainable way.
17
Honest and fair
with customers
and suppliers
A good
citizen
A purpose
which delivers
long-term,
sustainable
performance
A responsible
and responsive
employer
A guardian
for future
generations
Building a purpose-led bank
Our
strategy.
Our strategic priorities
Our strategy remains unchanged, to deliver on Our Purpose and drive sustainable returns to shareholders through four
strategic priorities. These strategic priorities will deliver growth while taking costs out. Combined with a disciplined approach
to capital allocation, this will deliver an improvement in returns over the longer-term.
Supporting customers at
every stage of their lives
We will be more relevant to our customers by
building deeper relationships and evolving
our propositions to meet their needs
throughout their lives, with the aim of
growing the number of needs
we meet per customer.
Simple to deal with
Through simplification and driving
efficiency, we will be much simpler as
a bank and much simpler to deal with
for our customers, improving both
customer experiences and colleague
engagement. We will focus on great
customer service technology and
improving customer journeys.
Our 2021 targets
Supporting
customers at
every stage of
their lives
Powered by
innovation and
partnerships
Simple to
deal with
Sharpened
capital
allocation
Powered by innovation
and partnerships
We will use new technology and digital
expertise to deliver an excellent
customer experience by harnessing
our internal knowledge and experience
of partnering with leading external
organisations around the world.
Sharpened capital allocation
We continually optimise our
regulatory capital. And we manage
our portfolios and use synthetic
trades to reduce capital consumption,
manage risk and drive sustainable
returns. This includes refocusing
NatWest Markets to support our
commercial business better and
a phased withdrawal from the
Republic of Ireland.
We launched our new strategy in 2020 to deliver on Our
Purpose and drive sustainable returns to shareholders through
our four strategic priorities. In 2021, we will continue to build
on these foundations as we drive forward our One Bank
transformation agenda.
One Bank transformation means looking across the entire organisation
and ensuring the right decision making and prioritisation will lead to
delivery of the outcomes that really matter; better customer experience,
meeting more customer needs, being simpler to deal with, and creating
better value for our shareholders.
Our Purpose and strategic priorities will continue to
support us, as we strive to be the leading relationship
bank for a digital world.
Whilst our strategy remains unchanged we
have updated our targets. These targets will
help us assess our progress against our
strategic priorities.
Notes:
(1) Total expenses excluding litigation and conduct costs,
strategic costs, operating lease depreciation and the impact
of the phased withdrawal from the Republic of Ireland.
(2) Comprises customer loans in our UK and RBS International
retail and commercial businesses, excluding UK Government
financial support schemes.
Priorities delivered through:
n Sustainable growth with an
intelligent approach to risk
n Simplification and cost efficiency
n Portfolio discipline and effective
deployment of capital
2021 Targets
n Cost reduction of c.4%
per annum through to 2023 (1)
n Lending growth above
rate through to 2023 (2)
n CET1 ratio of 13-14% by 2023
n ROTE of 9-10% by 2023
18
ClimateLeading the climate challengeLearningBuilding financial capabilityEnterpriseRemoving barriers to enterpriseOur PurposeWe champion potential, helping people, families and businesses to thriveTHINKING LONG-TERMWORKING TOGETHERSERVING CUSTOMERSDOING THE RIGHT THING Our execution
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Our execution is centred around Our Purpose, achieving a holistic
One Bank transformation and delivering our strategic priorities.
We are building on our strengths, to meet our customers’ needs
throughout their financial lives, enabling them to thrive.
Simple to deal with
Simplification
and Cost
Efficiency
New technologies present opportunities to
provide a more personalised experience to our
customers. Through the re-engineering of our
processes and changes to our organisation, we will focus on
building capabilities once and reusing those capabilities across
the entire bank. This will result in simpler customer journeys,
such as the development of a best-in-class account opening
process, allowing us to stand out in a competitive market.
Growth,
Simplification
and Cost
Efficiency.
Powered by innovation
and partnerships
By making it quick and easy for companies to
engage with us and by allocating investment
efficiently, we can form partnerships and advance the
innovations most relevant to our customers.
Sharpened capital allocation
Deployment
of Capital
The approach to allocating our capital will be
refined and standardised. We will decide the
markets we want to serve and what products
Supporting customers at
every stage of their lives
Growth
Using data, we will align ourselves to our
customers to better understand their behaviour,
we want to offer, based on how we can best support our
customers. The significant reduction of RWAs in NatWest
Markets and the decision to make a phased withdrawal from the
Republic of Ireland represent two significant examples of this.
ensuring we can adapt quickly to meet their needs. This
includes expanding our digital service, to become the most
accessible bank. We want our customers to be able to bank
with us anytime, anywhere.
Our performance against 2020 targets
Simple to deal with
Powered by innovation and partnerships
£277m
reduction in operating
expenses, exceeding
our target of £250 million
for 2020.(1)
9.0m
conversations with Cora, our
virtual assistant, a 68%
increase on 2019. 40% of
conversations required no
human intervention.
2019: £310m 2018: £278m
2019: 5.4m
Sharpened capital allocation
18.5%
CET 1 ratio, c.£7.7-9.4 billion
headroom to 13-14% targeted
range, more than double
our Maximum Distributable
Amount.
(2.4)%
Return on tangible equity.
Target of a 9-11% return
on tangible equity in the
medium-long term.
2019: 9.4% 2018: 4.8%
2019: 16.2% 2018: 16.2%
£170.3bn
Total risk-weighted assets
below our 2020 targeted
range of £185-£195 billion.
£26.9bn
NatWest Markets risk-
weighted assets versus a
2020 target of £32 billion.
£11 billion reduction since 2019.
2019: £179.2bn 2018: £188.7bn
2019: £37.9bn 2018: £44.9bn
19
BlackRock
Payit
Established new relationship
with BlackRock to support
our investment management
processing activity, enabling
savings to be passed onto
our clients.
We launched Payit our new
payment platform in June
2020, which uses the UK’s
Open Banking infrastructure
to enable online payments
direct from consumer bank
accounts in close to real time.
Supporting customers at every stage of their lives
£328.8bn
+7%
net lending growth in
our retail and commercial
businesses versus >3% target.
2019: £307.9bn 2018: £296.7bn
480,000
customers in vulnerable
situations contacted to
check on their welfare.
Note:
(1) Total operating expenses excluding litigation and conduct costs, strategic
costs and operating lease depreciation.
Building a purpose-led bank
Our Purpose areas of focus
building long-term value.
Our Purpose is to champion potential, helping people, families and businesses to
thrive. By breaking down barriers, smashing glass ceilings, pushing for equality
and fighting for the planet, we are going to pave the way for a better future.
We currently have three areas of focus: to remove barriers to enterprise, build
financial confidence and help to tackle climate change.
Our Ambition
Enterprise
Learning
Climate
The biggest supporter of start-ups
in the UK and Ireland
Leading learning organisation;
enhancing the financial capability of the
UK and Ireland and the skills of colleagues
Leading bank in the UK and Ireland
helping to address the climate challenge
Our Targets
50,000
incremental new
businesses created by
2023 through inspiring
and supporting >500,000
people.
2.5m
people reached through
financial capability
interactions each year.
-50%
At least halve the climate
impact of our financing
activity by 2030.
60%
of those inspired and
supported will be female.
2m
additional customers
helped to start saving
by 2023.
50%
of our UK and Ireland
customers’ homes at or
above EPC or equivalent
rating C by 2030. (1)
75%
of those inspired and
supported will be based
outside London and the
South East.
100%
front-line colleagues
professionally accredited
within first 18 months
in role.
£20bn
additional funding and
financing for climate and
sustainable finance
by 2021.
20%
of those inspired and
supported will be Black,
Asian and Minority Ethnic.
10%
of those inspired and
supported will be social-
purpose led.
UK
Social Mobility
Apprenticeship
Programme extended
across the UK.
+
Climate Positive own
operations by 2025.
>15%
Stop lending and
underwriting to
companies with >15%
of activities related to
coal (2, 3) and to all major oil
and gas producers, unless
they have a credible
transition plan.(2)
Our areas of focus contribute to UN Sustainable Development Goals (SDGs):
As signatories of the UN Principles for Responsible Banking we are committed to an
ongoing process to align our strategy with the 2015 Paris Agreement and the SDGs. Our
three areas of focus are mapped to seven prioritised SDGs. The business performance
sections on pages 33 to 45 highlight progress on our areas of focus and include the SDG
icons they seek to positively impact. Our case studies target wider SDG references as
we seek to raise awareness of, and further embed, SDGs into our strategy.
Notes:
(1) Percentage of aggregate UK and
RoI mortgage exposure.
(2) Full phase-out from coal by 2030.
(3) In line with the 2015 Paris Agreement
by the end of 2021.
20
Our 2020 performance.
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Enterprise
Learning
Climate
1,926
incremental businesses created in
2020, below our 2020 target of 6,500
new businesses, reflecting
the impact of COVID-19 on
business creation. (1)
80%
of 60,788 people inspired and
supported identified as female. (1)
72%
of 60,788 people inspired and
supported were based outside
London and the South East,
slightly below our target of 75%.
26%
of 60,788 people inspired and
supported were Black, Asian
and Minority Ethnic. (1)
52%
of 60,788 people inspired and
supported were social purpose-led.
45,000
We migrated our twelve accelerator
hubs around the country to
digital delivery with over 45,000
entrepreneurs attending 1,016
virtual events across the country.
£1bn
We supported female entrepreneurs
in 2020 by creating a £1 billion fund,
which has been fully deployed.
We have added a further
£1 billion to the fund in 2021.
2.9m
people reached through
financial capability interactions.(*)
600,000
additional customers
helped to start saving. (*) (2)
98%
of frontline colleagues
professionally qualified/
accredited within first 18
months in role.
2.3m
downloads of Island Saver, our first
ever educational video game
teaching children money
management skills.
760
Over 760 interns, graduates and
apprentices hired during 2020 and
a commitment made to hire
a further 1,000 by the end
of 2021.
Award
NatWest Group became the first
UK bank awarded Corporate
Chartered status by the
Chartered Banker Institute.
Learning
Launched the NatWest Group Learning
Academy bringing the very best
learning together in one central
online location for our colleagues.
Note:
(1) Data only tracked against select initiatives which included those focused on female and
social purpose-led entrepreneurs.
(2) Includes instances where customers had existing savings with other banks and transferred
them in to their NatWest Group account.
(3) Percentage of £92.9 billion mortgages in England and Wales for which EPC data is available.
(4) Includes £5 billion attributable to NatWest Markets, included in the £12 billion climate and
sustainable funding and financing figure.
(*) Within the scope of EY assurance. Refer to page 66.
21
36%
of Retail Banking mortgages
in England and Wales are at
or above EPC rating C.(3)
£315m
Since launching in October 2020, we
have received 1,229 applications for
Green Mortgages, with a value
of £315 million. These mortgages
are only available on the most
energy efficient properties.
£12bn
climate and sustainable financing
and funding (*), enabling us to bring
forward our £20 billion target
from 2022 to 2021. We expect to
exceed this target during 2021.
£23bn
NatWest Markets has helped
our clients issue 36 green
bonds totalling £23 billion to
support their environmental
activities . (4)
COP26
NatWest Group is principal banking
partner for this year’s COP26
summit, a clear demonstration
tackling climate change is at
the core of Our Purpose.
A-
We achieved a score of A- in
the 2020 CDP Climate Change
Survey, one of the strongest
scores amongst our peers.
Zero
Achieved Net Zero Carbon on
our own direct operations and
remain committed to making
them Climate Positive by 2025.
Building a purpose-led bank
Supporting our customers, colleagues
and communities throughout the
UK and Ireland through COVID-19.
The past year has shown NatWest Group at its best
as we responded to the challenges of COVID-19.
The dramatic spread of COVID-19 has disrupted lives and livelihoods, with effects
being experienced throughout communities and businesses worldwide. We moved
quickly to set up the necessary infrastructure to support our customers, colleagues
and communities. Throughout 2020 we have put in place extraordinary measures
of financial and non-financial support, underpinned by something every bit as
powerful – humanity, kindness and respect.
There are challenging times ahead as the longer-term impacts of the pandemic
become clear. NatWest Group is here to provide help and support to those who
need it as we adapt to dramatic changes in the way we live and the way we work.
Supporting our
customers
by pivoting our
operations at pace.
Supporting our
colleagues
has been a priority
during the crisis.
Supporting our
communities
by helping the most
vulnerable in society.
£14.1bn
of lending approved through
government schemes, with
c.300,000 applications
approved.
NHS
Dedicated phone lines
for NHS staff.
£5.0m
cash delivered to vulnerable
customers who couldn’t
access ATMs.
480,000
customers in vulnerable
situations, contacted to
check on their welfare.
258,000
mortgage repayment
holidays and payment
holidays on over 74,000
business customer accounts.
95%
of colleagues think
we are doing a good
job of responding
to the pandemic.
37,500
Launched a Wellbeing
Hub for colleagues with
over 37,500 hits.
50,000
Home working quickly made
available to over 50,000 colleagues,
with 37,000 technology
bundles delivered
to colleagues’ homes.
GP
Access to virtual GP and
SilverCloud wellbeing
platform for all colleagues.
22
1 million
Edinburgh head office turned into a
charity distribution hub helping Social
Bite, Trussell Trust and Cyrenians to
produce over 1 million meals
for those in need since the
start of March.
£10m
raised as we matched customer
donations to the National
Emergencies Trust (NET).
£1m
Coronavirus Response
Fund distributed by bank
supported charity, Social &
Community Capital.
£5m
Enterprise relief fund
launched with The
Prince’s Trust.
£1m
donated to eight not-for-
profit debt management
organisations.
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Building
financial
capability and
confidence
Note:
(1) According to the Money
and Pensions Service.
Many people struggle to manage their finances and
save for the future. Research shows that 22% of UK
adults have less than £100 in savings.(1) Building good
financial habits and improving relationships with money
can transform people’s lives.
To be a leading learning organisation is one of our three areas of focus, under Our
Purpose-led strategy. Through our learning agenda, we encourage everyone to develop
good money management skills. You’re never too young to start, that’s why we deliver free
MoneySense lessons in schools, inspiring 5-18 year olds to grow in financial confidence.
When face to face lessons were no longer possible, we launched MoneySense Mondays,
interactive lessons streamed in real-time on Facebook Live, that could be joined by parents
and children from their homes.
Since its launch 26 years ago, MoneySense has helped more than nine million young
people by providing activities, games and resources for students, teachers and parents to
help teach children about money.
To support customers of all ages, we held further Facebook Live events with Friends
Against Scams talking about the latest coronavirus scams and how customers can protect
themselves, together with events to explain ways to bank at home. These events helped
our customers bank digitally with confidence and stay safe during lockdown.
During national and local lockdowns many of our customers started to save for the first
time. We introduced the new Digital Regular Saver to help our customers start and maintain
a long-term savings habit. In the last four months of the year, we opened 215,000 Digital
Regular Saver accounts, helping our customers build financial security for the future.
23
Building a purpose-led bank
Our operating
environment.
This illustration of our operating environment
provides an integrated materiality assessment
of the most important considerations with
the potential to influence our ability to serve
customers and create value for the long term.
In 2020 we added the Global Pandemic
and Employment and Enterprise. The
impact of COVID-19 runs through all
considerations and is reflected in the
definitions that follow.
Societal
Megatrends
Operational
Resilience
Economic
and Political
Landscape
Cyber
Threats
Global
Pandemic
Demographics
Operating
Environment
Our
Stakeholders
Regulation
Culture and
Colleagues
Our Purpose
We champion
potential, helping
people, families
and businesses
to thrive
Employment
and Enterprise
Financial
Capability
and Social
Inclusion
Top and
Emerging Risks
Considerations with the
potential to influence our
ability to serve customers and
create value for the long term.
Example factors that inform our
integrated materiality assessment.
Competition
Customer
Behaviour
Climate
Change
Technology
and Innovation
Reputation
and Trust
United Nations
Sustainable
Development
Goals
Where to find out more:
page
Global Pandemic
Chairman and CEO statements
8-15
Our Purpose areas of focus
How we create value
Our stakeholders
Top and emerging risks
20
30-31
46-61
64
Climate-related disclosures
69-83
COVID-19 has had global ramifications on health, economies, societies
and the environment. The pandemic has put Our Purpose-led strategy into
action, as we supported individuals, families and businesses to deal with the
immediate and longer-term impacts. We responded quickly to the elevated
credit risks via active portfolio management including adjustment of risk
appetite, proactive customer contact strategies and scenario analysis. Our
participation in government initiatives supported customers during the crisis
and included the Bounce Back Loan Scheme which could increase conduct,
reputational and fraud risks. High uncertainty remains on the ultimate
impact of the pandemic and across the economic landscape, and strategy
is being adapted in response. ‘Build Back Better’ became the call from the
UN and we support a focus on opportunities unlocked by the transition to a
low carbon economy, progress on racial inequality, helping communities to
thrive, as well as greater alignment with UN Sustainable Development Goals.
24
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Building a purpose-led bank
Economic and Political Landscape
The economic environment in 2020 became and
remains unusually uncertain as the COVID-19 crisis
delivered an unprecedented shock to the UK and global
economy. Support schemes for furloughed workers and
government backed loans for businesses supported
the economy as priorities were placed on public health,
capacity of the NHS, and social distancing restrictions
until the roll out of a vaccine. Significant risks remain
regarding the extent of the economic contraction and
weaker than expected recovery from COVID-19, elevated
geopolitical risks and developments in relation to a
Scottish independence referendum. In the longer term,
demographic change, high levels of debt and inequality
could all have financial impacts. As a result, we closely
monitor these risks with strategic plans adapted as
appropriate.
bank in the UK and RoI helping to address the climate
challenge. Through engagement with key stakeholders,
we are working to champion climate solutions and
accelerate the speed of transition in line with the 2015 Paris
Agreement. In 2020 we became a sponsor of COP26.
Reputation and Trust
Restoring trust and safeguarding reputation remains a key
priority for most banks. We strive to build a reputation as a
purpose-led bank: championing potential, helping people,
families and businesses to thrive. As a relationship bank for
an increasingly digital world, our strategic priorities are to
be simple to deal with, supporting customers at every stage,
powered by innovation and partnerships and sharpened
capital allocation. Customer NPS and stakeholder
engagement and advocacy act as measures of satisfaction,
reputation and trust.
Demographics
Customer Behaviour
Demographic shifts mean that the needs and behaviours of
our customers are changing. In 2020 this was amplified by
lockdowns and social distancing leading to some customer
segments adopting new technologies for the first time. Key
trends continue to impact our customers including retiring
later and working longer, renting for longer or buying a house
later in life and often with the support of family members
and more focus on financial planning for retirement. We are
committed to supporting the evolving needs of customers
ranging from home ownership to digital banking and
supporting customers at every stage of their lives.
Employment and Enterprise
Unemployment rose to its highest level since 2016 during
2020. Government support schemes were successful in
limiting a more material impact on the labour market, while
government-backed lending schemes provided liquidity
across the SME and corporate sectors. We are the biggest
supporter of UK businesses and Enterprise is one of our
three areas of focus. We acted to support businesses
throughout COVID-19 and continued to address barriers for
start-ups in underrepresented groups including supporting
female entrepreneurship, Black, Asian and Minority Ethnic
businesses, areas outside of London and socially purposeful
businesses in the drive toward a low carbon economy.
Financial Capability and Social Inclusion
Supporting financial capability and confidence sits within
our three areas of focus. It goes beyond delivering fair
products and great service. It means helping customers,
wider society and future generations to develop good
money management skills so they are empowered to make
better financial decisions. Customers are supported by a
diverse range of tailored banking services and products. In
2020 we increased focus on supporting customers facing
financial difficulty, or in vulnerable situations, and helping
more people to start saving.
Climate Change
Customers’ needs and behaviours are changing as a result
of new technologies, demographic shifts and changing
labour patterns. The impact of COVID-19 accelerated
trends toward digital technology, changed ways of working,
shopping, socialising and communication and how people
use the physical spaces. We understand the importance of
supporting customers' needs, being simple to deal with and
supporting customers at every stage of their lives to tailor
banking services and products that meet their evolving
needs and expectations.
Technology and Innovation
Customer behaviours continue to change, and new
business models emerge, through advancing technology.
COVID-19 has increased our customers’ reliance on
technology with a further shift to digital, reinforcing the
need for modern capabilities and resilient systems. Our
active digital users across both personal and business
customers continued to grow in 2020 and we invested £581
million on technology. Our focus is to reduce year on year
cost by simplifying processes, improving our resilience and
stability whilst helping to deliver innovative solutions for our
customers.
Competition
We operate in markets that are highly competitive raising
the threat of a sustained loss of business volumes or
sustained margin pressure related to changes in regulation,
developments in financial technology (including digital
money and competition from digital niche competitors) and
major shifts in customer behaviour. We closely monitor the
competitive environment and adapt strategy as appropriate
to deliver innovative and compelling propositions for
customers. The roll out of Tyl and the launch of Payit were
significant milestones in the evolution of our competitive
offering.
Culture and Colleagues
We expect to face significant risks in connection with
climate change and the transition to a low carbon economy.
These risks are subject to rapidly increasing prudential and
regulatory, political and societal focus, both in the UK and
internationally. We have set an ambition to be a leading
Building and nurturing a healthy culture where colleagues
are engaged, and where our working environment is
underpinned by robust risk behaviours, is critical to
delivering on our purpose and strategy. In 2020 we
supported colleagues as they transitioned to new ways of
working, focusing on wellbeing while continuing to build an
25
Building a purpose-led bank
inclusive bank which is a great place for all colleagues to
work. Becoming a learning organisation sits within one of
our three areas of focus as we prepare colleagues for the
future and embed Our Purpose.
Regulation
We operate in a highly regulated market which continues
to evolve in scope. Areas of regulatory focus include
customers in vulnerable situations, climate change,
financial crime, capital and liquidity management, use of
models and the transition to alternative risk-free rates. We
monitor regulatory change, implement new regulatory
requirements where applicable and have regular
engagement meetings with regulators to discuss key
regulatory priorities.
Cyber Threats
We experience a constant threat from cyber-attacks
both directly and to our supply chain, re-enforcing the
importance of due diligence with the third parties on which
we rely. We continue to invest significant resources in the
development and evolution of cyber security controls and
work to protect and educate our customers on fraud and
scam activity.
Operational Resilience
To provide continuity of service for customers with minimal
disruption, we continue to monitor and assess a diverse
and evolving array of threats, both external and internal,
as well as developing, strengthening or adapting existing
control capability to be able to absorb and adapt to such
disruptions.
Human Rights and Modern Slavery
At NatWest Group, we understand that respecting human rights is the right thing to do. We do not tolerate or
condone abuse of human rights within our business, supply chain or within our sphere of influence. Our approach
to respecting human rights is guided by the United Nations Guiding Principles on Business and Human Rights and
aligned to Our Purpose-led strategy and Our Values of “Doing the Right Thing’ and “Thinking Long Term’. We
supported the adoption of the Modern Slavery Act (2015) in the UK and seek to tackle modern slavery through a
continued implementation of policies covering our customers, colleagues and suppliers, and by monitoring our
financing and supply chain for this activity. In 2020 we published our 2019 Modern Slavery Act Statement and
updated our Human Rights Statement. Visit natwest.com for further information.
UN Principles for Responsible Banking
As members of (UNEP FI) United Nations
Environment Programme Finance Initiative we
were proud to become a founding signatory to
the UN Principles for Responsible Banking (PRB)
in September 2019. We are committed to an
ongoing process to align our strategy with the UN
Sustainable Development Goals and the 2015 Paris
Agreement and we are embedding the six principles
across our business. Our first self-assessment
reporting will be available in our ESG supplement
expected to be published in March 2021.
Principle 1:
Alignment
Principle 3:
Clients &
Customers
Principle 4:
Stakeholders
Principle 2:
Impact & Target
Setting
Principle 5:
Governance &
Culture
Principle 6:
Transparency &
Accountability
26
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
We’ve set out
commitments to
racial equality
In 2020, a colleague-led taskforce was brought
together to help the bank listen, learn and better
understand what more we can do to champion
the potential of everyone.
This work builds on the progress we have made over the past five years to create a
more inclusive and diverse culture, whilst recognising we still have more to do.
We have published ‘Banking on Racial Equality – A Roadmap for Positive Change’, our
report on racial equality for our customers, colleagues and communities. The report
includes a set of commitments and targets, to make a meaningful, positive difference
to people from Black, Asian and Minority Ethnic backgrounds.
As Black colleagues are particularly under-represented in senior roles across the
UK, relative to the UK working population, we have introduced a new target to have
3% Black colleagues in our UK senior roles by 2025. This is in addition to our existing
target to have at least 14% Black, Asian and Minority Ethnic leaders in senior UK roles
by 2025. As at the 31 December 2020 we have on aggregate 10% Black, Asian and
Minority Ethnic colleagues in our top four leadership layers in the UK, representing a
2% increase since targets were introduced.
We are confident our report will spark reflection and action that will pull down the
barriers that prevent too many from reaching their potential. We believe future
employees of all ethnicities will read this report and aspire to work at NatWest Group
because we are a diverse and inclusive place to work, one that works hard to enable
everyone to bring the best of themselves to work and doesn’t leave anyone behind.
27
Building a purpose-led bank
Outlook. (1)
NatWest Group, as with all companies, continues to deal with
a range of significant risks and uncertainties in the external
economic, political and regulatory environment.
Expectations regarding the rate of economic recovery
continue to change rapidly in response to government
measures to limit the spread of COVID-19, expectations
around the rollout of COVID-19 vaccines and policy
measures to support the recovery.
Our central economic forecasts, as detailed on pages 173-
175 in the 2020 Annual Report and Accounts, support our
corporate plan, and are in line with the consensus view.
The rollout of COVID-19 vaccines enables recovery through
2021, with GDP growth of around 4.5% expected, gradually
moderating thereafter. Interest rates are expected to
remain low throughout the forecast horizon, with an
anticipated reduction in the central bank rate to zero in the
second quarter of 2021. The unemployment rate reaches
around 7% before beginning to steadily reduce from 2022,
supported by the ongoing recovery. A decline in house
prices in the low-single digits is forecast for 2021 before
improving steadily.
The short and medium term outlook continues to be subject
to significant uncertainty and we will continue to actively
monitor and react to market conditions and refine our
internal forecasts as the economic position evolves.
2021 Outlook
We plan on reducing other expenses, excluding OLD, by
around 4% in comparison to 2020, excluding any change in
the direct cost base of Ulster Bank RoI. We also expect to
incur strategic costs of around £0.8 billion during 2021 from
the continued refocussing of NatWest Markets and resizing
of the Group’s cost base.
We expect NatWest Markets exit and disposal costs and
the impact of Commercial Banking capital management
actions to total a combined £0.3 billion in 2021.
Our full year 2020 impairment loss rate was 88 basis points
of gross customer loans. We expect that the full year 2021
loss rate will be at or below our through the cycle guidance
of 30-40 basis points, with losses driven by a combination
of the developing economic outlook for the UK and Republic
of Ireland and the level of economic distress experienced
by our personal and commercial customers as government
support measures scale down and restrictions ease.
We are targeting above market rate lending growth
across our UK and RBS International retail and
commercial businesses, excluding UK Government
financial support schemes.
We expect NatWest Group RWAs, including Ulster Bank
RoI, to be in the range of £185-195 billion, when including
on a proforma basis the impact of Bank of England’s
mortgage risk weight changes and other model changes
introduced on 1 January 2022. The impact of the mortgage
regulatory changes is expected to be around £12 billion,
subject to the timing and quantum of any procyclicality
before implementation and based on the current book size
and weighting. The £12 billion equates to an anticipated
book risk weight of 15% which is subject to change. In 2021
we also expect to achieve the majority of the remaining
NatWest Markets RWA reduction towards the medium term
target of £20 billion, but expect minimal reduction in RWAs
in Ulster Bank RoI in 2021 as a result of the completion of the
strategic review announced today. Other changes in RWAs
will be driven by the level of procyclical inflation driven by
the economic outlook, downgrades in the credit quality and
assessments in the commercial book and ongoing demand
for lending from our customers.
NatWest Group capital and funding plans focus on issuing
£3-5 billion of MREL-compliant instruments, with a
continued focus on issuance under our Green, Social and
Sustainability Bond Framework, around £1.0 billion of AT1
and around £2.0 billion of Tier 2 instruments. As in prior
years, we will continue to target other funding sources to
diversify our funding structure.
Medium term outlook
We expect to achieve a return on tangible equity of 9-10%
and a CET1 capital ratio of 13-14% by 2023. Supporting
this we are targeting above market rate lending growth
per annum across our UK and RBS International retail and
commercial businesses and expect annual cost reduction of
around 4%, excluding the impact of the phased withdrawal
from the Republic of Ireland, along with continued strategic
cost reduction.
We anticipate RWA inflation from Basel 3 amendments to be
less than 5% of RWAs as at 31 December 2020 and currently
expect implementation in 2023. The details of Basel 3
amendments remain subject to regulatory uncertainty on
both quantum and timing.
As a result of the decision to withdraw from the Republic
of Ireland announced today we would expect the level
of RWAs to reduce in the coming years, and for this
withdrawal to be capital accretive for NatWest Group
across the multi-year process.
NatWest Group capital distributions
Subject to economic conditions being in line with, or
better than, our central economic forecast, NatWest
Group intends to maintain ordinary dividends of around
40% of attributable profit and aims to distribute a
minimum of £800 million per annum from 2021 to 2023
via a combination of ordinary and special dividends.
NatWest Group intends to maintain the required capacity
to participate in directed buybacks of the UK Government
stake and recognises that any exercise of this authority
would be dependent upon HMT’s intentions and is limited
to 4.99% of issued share capital in any 12 month period.
Note:
(1) The guidance, targets, expectations and trends discussed in this section
represent NatWest Group plc management’s current expectations and are
subject to change, including as a result of the factors described in the “Risk
Factors” section on pages 345 to 362 of the NatWest Group plc 2020 Annual
Report and Accounts and on pages 156 to 172 of the NatWest Markets Plc 2020
Annual Report and Accounts These statements constitute forward-looking
statements. Refer to Forward-looking statements in this document.
28
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
SafeLives
NatWest Group works with SafeLives, the UK-wide
charity dedicated to ending domestic abuse, for
everyone and for good.
Through our relationship, SafeLives has consulted on bank policies and practices
to improve outcomes for customers, leading to the innovation of our e-form for
survivors to contact the bank safely and the introduction of video banking to
prevent impersonation of victims.
In 2020, NatWest Group launched a review into how it can better support
customers who have been victims of economic abuse and acquired coercive debt
and announced a £1 million fund to support survivors of economic and domestic
abuse, the first bank in the UK to offer this amount of financial support. The review,
conducted in conjunction with SafeLives, will look at internal processes, as well as
preventive solutions and practical support available for customers affected.
This new NatWest Group fund will be open to victims of economic and domestic
abuse across the UK and will increase access to tools, support and financial
assistance. SafeLives and NatWest Group will work together with survivors and
specialist domestic abuse services to co-create the programme, making sure the
lived experience of survivors influences its design, so it meets people’s needs and
helps build financial confidence and independence.
29
Building a purpose-led bank
How we
create value.
1. Our resources
2. Our business activities
Financial
Our strategy
We make appropriate use of
shareholder capital and other
forms of financial capital, including
£431.7 billion in customer deposits.
Human and Relationships
We rely on an engaged, healthy
and inclusive workforce to deliver
our strategy to 19 million customers
in the UK and Ireland.
Our relationships with all stakeholder
groups help to shape and support our
strategy and operations. This includes
our shareholders and regulators,
suppliers, consumer and campaign
groups, local communities and more.
Our strategy is to deliver on Our Purpose and drive sustainable
returns to shareholders through four strategic priorities. These
are: supporting customers at every stage of their lives; being
simple to deal with; powered by innovation and partnerships,
and; sharpened capital allocation (refer to pages 4 to 7 for
more information).
Our customers
We support our personal, business, commercial and institutional
customers with financial services that meet their needs.
Understanding and delivering help for what matters to our
customers is what we seek to do every day.
We believe in treating customers fairly, offering flexibility to our
customers in how they choose to bank with us and providing
extra help to customers in vulnerable situations or financial
difficulty. This includes keeping their funds safe and secure,
improving financial capability and supporting enterprise.
Natural Resources
Our business model
We understand we are part of the
natural world, benefiting from
resources including paper and water
to conduct our business activities.
We were jointly the first company
worldwide to sign up to all the Climate
Group initiatives on electric vehicles
(EV100), energy productivity (EP100),
and renewable power (RE100).
We earn income from interest charged on lending to our
customers and fees from transactions and other services. We pay
interest to customers who place deposits with us and to investors
who buy our debt securities. We also make reward payments on
products like our Reward bank accounts and credit cards. The
attributable profit generated is either returned to shareholders
or retained and reinvested into new and improved products and
services for our customers.
Infrastructure
Our products and services
Customer infrastructure includes
online and mobile banking, video
banking, our High Street branches,
Post Office branches, intermediary
channels, contact centres, telephony,
webchat and cash management
services, as well as self-service
options such as ATMs and Cash
Deposit Machines. We also depend
on our property and technology
infrastructure, and that of our supply
chain, to run the bank’s systems and
operations.
Our critical technology systems have
been available 99.98% of the time and
typically over 95% of branches have
been available each day during the
pandemic, other service channels have
remained fully available.
We support the financial lives of our customers and drive
economic growth through our well-known brands. We provide
a comprehensive range of banking and financial services to
personal, business and commercial customers via our franchises.
Examples include current and savings accounts, credit cards,
mortgages and investments for our personal customers; to
banking, lending, project finance, risk management and trading
solutions for our large commercial customers.
Our partners and networks
We work with a diverse range of partners to help shape our
business strategy and deliver positive outcomes for customers
and society. This includes our supply chain, communities,
academia, regulators, expert advisors, consumer groups and
charities, as well as strategic partners. We are also members of,
or signatories to, a large number of organisations, trade bodies
and frameworks that help us create long-term value and balance
the interests of stakeholders.
30
Building a purpose-led bank
3. How we create value for our customers and society
We are a relationship bank for an increasingly digital world. We champion potential so the people, families and businesses we serve
can thrive. We will break down barriers, build financial confidence, and help to tackle climate change.
Our Purpose-led strategy has been developed using the five principles of the Blueprint for Better Business (1), considering the needs
of all stakeholders in the way we operate. In addition, we are members of the UN Global Compact and founding signatories of the
UN Principles for Responsible Banking, committing to an ongoing process to align our strategy with the 2015 Paris Agreement and
the UN Sustainable Development Goals. Examples of how we create value include:
Supporting
enterprise
£32.4 billion gross lending to SMEs and mid-corporates in
Commercial Banking.
Our areas of focus
For more information
refer to pages 20 and 21.
Since we brought our Entrepreneur Accelerator network in-house
in 2018, a minimum of 2,416 jobs have been created by businesses
supported through the Accelerator programme. 1,004 of these jobs
were created in 2020. (*)
In January 2020 we launched our £1 billion funding for Female
Entrepreneurs; as a result we lent over £1 billion to female entrepreneurs,
which included support through the government loans schemes.
More opportunities
for business and
enterprise
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Building
financial
capability
Climate and
sustainable
funding and
financing
Jobs and
the economy
Protecting
our customers
Improving
digital
capability
Community
and charitable
giving
A healthy
and inclusive
culture
Homes and
Housing
We have helped over 600,000 customers to start to save and reached
2.9 million people through financial capability interactions.(•) (2)
MoneySense has been running for over 26 years, during which it has
Helping people make
better financial
decisions
helped over 9 million young people.
In 2020, we supported customers with £12 billion climate and
sustainable funding and financing through 186 deals, for a range of
customers on their decarbonisation ambitions. (*)
NatWest Group has been announced as principal banking partner
of COP26.
Taking action
on the risks and
opportunities climate
change presents to us
and our customers
One of the largest UK employers with a workforce of 59,822. We
recruited 390 graduates, 115 apprentices and 261 interns in 2020.(3)
Payment of £1.14 billion in tax to the UK Government, which supports
central government and local authority spending. (4)
A responsible
business supporting
employment across
the UK and Ireland
Publication of an interim impact report (Jul-20), detailing that proceeds
from the €750 million social bond (Nov-19), created an estimated 6,900
jobs in some of the most deprived parts of the UK.
Prevented 572,665 cases of attempted fraud amounting to over
£252.3 million in the UK. (*)
Malwarebytes, a security tool made available via our Online Banking
platform, has been downloaded over 145,000 times.
Keeping money safe
and accessible for
our customers
78% of our active personal current account customers are digitally
active, using either mobile or online channels. (*)
We have 9.4 million active digital customers. 7.7 million actively use our
mobile app and 4.7 million use our online banking platform.
Offering customers
more choice and
ways to bank
Our colleagues and customers raised £10 million for the National
Emergency Trust’s (NET) Coronavirus Appeal.
We supported the DEC Coronavirus Appeal, raising £387,954.
Our colleagues volunteered 13,599 hours. Good causes received over
£3.2 million through colleague generosity.
Our colleagues
make a difference
supporting
charities and local
communities
Progress continues on our inclusion agenda to value diversity in all its
forms and to be gender balanced, ethnically diverse, disability smart
and LGBT+ innovative.
We flexed and evolved our existing wellbeing plans to build learning,
provide practical tools and support our colleagues during the pandemic.
Building a great place
to work that reflects
the society we are
proud to serve
Helped 258,000 customers with mortgage payment holidays during
the coronavirus pandemic.
More than 32,000 first time buyer mortgage customers. (*)
Our new Green Mortgage helps customers purchase more energy
efficient homes by lowering their interest rate costs, rewarding them
for playing their part in the fight against climate change and supporting
50% of our mortgage book to become Energy Performance Certificate
(EPC) C or above by 2030.
We are helping
more people access
efficient homes
(1) For more information about Blueprint for Better Business refer to page 17.
(2) Includes instances where customers had existing savings with other banks and transferred them in to their NatWest Group account.
(3) As at 31 December 2020, includes all global permanent employees.
(4) Comprises £113 million corporate tax, £498 million irrecoverable VAT, £177 million bank levies, £269 million employer payroll taxes and £87 million other taxes.
(*) Within the scope of EY assurance. Refer to page 66.
31
Building a purpose-led bank
Learning
through play
NatWest Group launched Island Saver in 2020, its
first ever educational video game which harnesses
children’s enthusiasm for video games as an opportunity
to teach them about money management.
Created with the independent games developer Stormcloud Games, Island Saver is an
open world, non-violent, first-person game, set on the idyllic Savvy Islands with an array
of environments to explore. Designed for 7-12 year olds, players are armed with a ‘trash
blaster’ and tasked with cleaning up the islands of litterbugs that have polluted paradise.
Learning through play is at the heart of Island Saver and woven into the gameplay are a
series of money and environmental learning points. These range from a simple work-to-
earn loop, as characters earn coins by recycling litter, to saving money in bank accounts
and using a PIN. As players progress through the game they’ll also be introduced to the
more advanced money concepts including paying tax, bartering, borrowing money,
scams and foreign exchange.
Island Saver is available to download for free on PlayStation, Xbox One, Nintendo
Switch, PC (via Steam), Android and iOS. The game has received great ratings on all
platforms: 10/10 on Steam; 4.8/5 in the Apple App Store; 4.6/5 on Xbox; and 4.5/5 on
PlayStation. It was also in the top 20 downloads on Nintendo Switch in Europe and
North America in June 2020.
In 2020, Island Saver was downloaded over 2.3 million times.
32
Our business
performance.
Retail Banking
Ulster Bank RoI
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
We provide a comprehensive range of banking products
and related financial services including current accounts,
mortgages, personal unsecured lending and personal
deposits. We're here for customers whenever and
wherever they need us through a range of convenient
ways to bank, from our mobile app and online banking
through to our contact centres and high street and mobile
branches. Offering 24/7 banking facilities, customers are
served through the NatWest and Royal Bank of Scotland
distribution channels.
We provide a comprehensive range of financial services
through Personal and Commercial Banking divisions.
Personal Banking provides loan and deposit products through
a network of branches and direct channels, including the
internet, mobile and telephony. Commercial Banking provides
services to business and corporate customers, including small
and medium enterprises.
Commercial Banking
Private Banking
We offer comprehensive banking and financing solutions to
start-up, SME, Commercial and Corporate customers in the
UK. We are there for our customers as they start, grow and
manage their businesses. Our innovative products and
services help customers achieve their growth, environmental
and social targets. We deliver a high-quality sales and
service experience through our expertise and deep
engagement, locally, regionally and nationally through
face-to-face, direct and digital channels. We continue to
support our customers through the Brexit transition period
and beyond.
Through the Coutts and Adam & Company brands, we
provide private banking and wealth management services to
UK-connected high net worth individuals and their business
interests. We continue to focus on delivering the best client
experience through a proactive engagement model which
supports clients across both sides of their balance sheet.
Our client centric strategy is focused on improving returns
by deepening client relationships and improving our digital
banking capabilities to make it easier for clients to deal with us.
RBS International
NatWest Markets
Depositary
Services
We are one of the largest banks operating in the local and
institutional banking sectors in the Channel Islands, Isle of Man
and Gibraltar. We serve international customers with a UK
connection through our International Banking proposition.
It also has wholesale branches and fund depositary services
businesses in the UK and Luxembourg to further serve our
institutional clients and protect investors.
We help NatWest Group’s corporate and institutional
customers manage their financial risks safely and
achieve their short-term and long-term sustainable
financial goals. We think and act as one bank for our
customers, collaborating with teams across the NatWest
Group to be the partner of choice for our customers and
their financial markets needs. By focusing on the things
we do best and that matter most to our customers, we
help champion potential.
33
Building a purpose-led bank
Retail
Banking
Total
income (£m)
2020
2019
4,181
4,866
Operating
expenses (£m)
(2,540) (3,618)
Impairment
losses (£m)
Operating
profit (£m)
(792)
(393)
849
855
Net loans to
customers (£bn)
172.3
158.9
Risk-weighted
assets (£bn)
36.7
37.8
Return on
equity (%)
10.2
9.6
(1) Comparisons with prior periods are
impacted by the transfer of the Private
Client Advice business to Private Banking
from 1 January 2020. The net impact on
full year 2019 operating profit would have
been to decrease total income by £44
million and other expenses by £8 million.
The net impact on the Q4 2019 balance
sheet would have been to decrease
customer deposits by £0.2 billion.
(2)
Includes instances where customers
had existing savings with other banks
and transferred them in to their NatWest
Group account.
We’re focused on offering customers the best digital experience
combined with seamless access to our highly professional and
engaged colleagues. We’ve invested in our digital capability,
extending our video banking service and introducing a range
of new features on our mobile app to help customers improve
their financial capability. We’ve progressed on our climate
commitments and put in place a comprehensive package of
measures to support customers in financial difficulty.
Throughout the COVID-19 pandemic, 95% of branches remained open and we continued
supporting customers 24/7 through our contact centres with our virtual assistant Cora
being named ‘Best Informational Bot’ at the 2020 AI Breakthrough Awards.
Through Customer Care campaigns set up as a proactive response to the pandemic, we
called nearly 600,000 customers to provide support, including almost 480,000 customers
in vulnerable situations, in addition to launching dedicated carelines for these customers
and NHS staff. We helped shielding customers to access cash and supported every
customer to bank safely and conveniently through digital channels and virtual face-
to-face appointments with Video Bankers. We helped over 250,000 customers access
mortgage repayment holidays and we offered interest-free limits up to £500, removed
fees, and deferred planned interest rate increases on customer overdrafts.
Supporting our areas of focus:
• Learning: Our Community Bankers led financial education online
during the pandemic, offering free weekly Facebook events including;
‘MoneySense Mondays’ for young people, and ‘Ways to Bank
Wednesdays’ to help promote digital banking.
We conducted over 945,000 Financial Health Checks to improve
customers’ financial capability. Additionally, our Know My Credit
Score tool in the mobile app, helped 3.1 million customers understand
their credit score and how they can improve it. This practical support
enabled 600,000(2) customers to start saving with us this year.
• Climate: Our Purpose-led response to climate change remains a
priority and we have committed to ensuring 50% of our UK and RoI
customers’ homes are at or above EPC or equivalent rating C by 2030.
We launched an online ‘Go Green’ Hub in July 2020 to help customers
reduce their environmental impact and we announced a ground
breaking agreement with innovative technology and sustainability
company CoGo, to help customers track and reduce their carbon
footprint, a UK first.
We introduced £100 thank you payments to customers borrowing money to make
energy efficient home improvements as part of the UK Government’s Green Homes
Grant and in October 2020 we launched Green Mortgages which offer lower interest
rates for customers purchasing energy efficient homes.
>945k
Financial Health Checks
conducted in 2020.
At the end of 2020 we agreed to purchase c.£3.0 billion of prime residential mortgages
from Metro Bank plc. The sustainable returns delivered through this acquisition will
complement the strong organic growth achieved through our current channels.
Despite challenging operating conditions including impairment losses of £792 million,
we delivered an operating profit of £849 million, down 0.7% compared to 2019. Other
expenses of £2,295 million were 4.5% lower than in 2019. Gross new mortgage lending
was £31.5 billion in 2020, providing a new business share of 13% supporting overall net
lending growth of 8.4% and mortgage stock share of 10.9%.
34
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Bank anytime,
anywhere
More of our customers are accessing our services
digitally – which is now more important than ever.
We now have 9.4 million active digital users, up from 8.7 million in 2019 and
we added 0.9 million newly active mobile users during 2020, taking the total
to 7.7 million. By the end of 2020 we were holding 9,000 weekly video banking
conversations with customers, compared to fewer than 100 per week in January
2020 – allowing our colleagues to support our customers with a highly personal
service from the safety of their own homes. Our digital services are fast, simple
and convenient, making it easy for our customers to manage and look after their
money, especially during the disruption of 2020.
Our digital offering continues to be powered by innovation. Cora, our 24/7 AI
virtual assistant, had nine million customer conversations in 2020, and she played
a crucial role during the pandemic. When payment holiday demands spiked, Cora
stepped in, serving customers via our mobile app and online banking, so they
didn’t need to go into a branch or wait on the phone. So far, she's had 370,000
customer requests for payment holidays, freeing up colleagues' time to support
customers with more complex queries. Requesting a PIN reminder, changing
address and even getting balance and recent transaction information can all now
be done via Cora. Crucially, when Cora can't help, she can put customers straight
through to a colleague, for a seamless experience.
35
Building a purpose-led bank
Ulster Bank
(RoI)
Total
income (€m)
Operating
expenses (€m)
Impairment
(losses)/releases
(€m)
Operating
(loss)/profit (€m)
2020
2019
574
647
(548)
(630)
(281)
38
(255)
55
Net loans to
customers (€bn)
20.0
21.4
Risk-weighted
assets (€bn)
13.2
15.3
Return on
equity (%)
(11.7)
2.3
Supporting our personal and business customers in the Republic of
Ireland through COVID-19 has been a top priority in 2020. Following an
extensive review and despite the progress that has been made, it has
become clear Ulster Bank in the Republic of Ireland will not be able to
generate sustainable long term returns for our shareholders.
As a result, the Group will begin a phased withdrawal from the Republic
of Ireland over the coming years which will be undertaken with careful
consideration of the impact on customers and our colleagues.
Throughout 2020 we have demonstrated the depth of our commitment to customers,
colleagues and communities affected by COVID-19. This support included putting in
place mortgage payment breaks for over 12,400 customers, dedicated phonelines and
branch opening hours for frontline workers and elderly customers, increased payment
and ATM limits and a new companion card for our customers in a vulnerable situation
due to COVID-19 and their trusted carers.
We continued to re-shape our business and adapt to shifts in our operating
environment. During 2020 we accelerated our digital capabilities to support increased
customer demand for digital services. This included launching our new Video Banker
service for personal customers and a new end-to-end digital onboarding and lending
platform for business customers, including end-to-end digital lending up to €50,000 and
the ability to apply online up to €500,000.
Supporting our areas of focus:
• Learning: We enhanced our focus on protecting customers from
frauds and scams, raising awareness through a nationwide radio
and social media campaign, supported by a series of virtual
Friends against Scams events and free anti-malware software for
customers. We also continued to support the financial capability of
our customers through the launch of our new Home Saver regular
savings account, helping savers on their journey to home ownership,
and education initiatives such as MoneySense.
• Enterprise: We worked with the Strategic Banking Corporation of
Ireland (SBCI) to deliver a range of loan and working capital schemes
for businesses impacted by COVID-19, providing €85 million in
lending under these schemes and supporting over 4,500 business
customers with payment breaks.
• Climate: In addition to reducing our own environmental impact, we
are committed to helping our customers transition to a low carbon
future economy. In 2020 this included launching our new four-year
fixed rate Green Mortgage for homes with a B2 Building Energy
Rating (BER) or higher.
>12,400
customers supported with
mortgage payment breaks.
We also recognise our role in helping local communities and have adapted our annual
staff fundraising campaigns, including ‘Do Good Feel Good’ and other community
support initiatives, for the unique challenges of 2020, raising over €70,000 for a wide
range of charities across the Republic of Ireland.
An operating loss of €255 million was primarily due to increased impairment losses and
lower income as a result of COVID-19. Net loans to customers reduced by €1.4 billion
in comparison to 2019 reflecting lower levels of personal and commercial lending, and
increased loan provisions.
36
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Ulster Bank
Hackathon
Now in its fifth year, the Ulster Bank Hackathon
has a reputation for attracting some of the best
and brightest minds.
Working with start-up hub Dogpatch Labs, the Ulster Bank Hackathon is one of
Ireland’s most established Hackathons, bringing together coders, data scientists,
designers, entrepreneurs and colleagues to ‘hack’ out new ideas and innovations,
collaborating to disrupt the future of banking.
This year it took place virtually, with an overwhelming energy and commitment
from participants across the world. 50 hackers tuned in from Ireland, the UK, the US
and from as far away as India, and took part in 11 teams along with 17 mentors, five
industry Pitch Judges, and five Technical Judges. Teams accelerated their ideas with
additional resources including Ulster Bank’s API Sandbox and Microsoft’s Power
Platform, plus had first-hand access to a global network of mentors from a range of
talented entrepreneurs and business people.
The Ulster Bank Hackathon has a reputation for creating an exciting, disruptive,
safe space for some of the best minds to come together and test their ideas using
technology they wouldn’t otherwise have access to. The teams focused on financial
confidence, climate and smart data, all with the same end goal in mind – how can we
change things for our customers for the better?
37
Building a purpose-led bank
Commercial
Banking
Total
income (£m)
Operating
expenses (£m)
Impairment
losses (£m)
2020
2019
3,958
4,318
(2,430) (2,600)
(1,927)
(391)
Operating
(loss)/profit (£m)
(399)
1,327
Net loans to
customers (£bn)
108.2
101.2
Risk-weighted
assets (£bn)
75.1
72.5
Return on
equity (%)
(4.5)
8.4
We have played a leading role in the COVID-19 crisis response,
delivering on Our Purpose-led strategy by helping businesses
with a comprehensive package of initiatives, including
participation in the UK Government’s financial support schemes.
Supporting customers has been our top priority, as we have
accelerated our strategy to remain accessible through remote
channels, providing digital frontline assistance as well as support
from our relationship managers.
Throughout the COVID-19 crisis we supported our customers by approving £13.8 billion
in UK Government scheme lending, without the requirement for personal guarantees
from the outset, providing payment holiday on over 74,000 customer accounts and
extending our existing Growth Fund Package by £5 billion. We launched a £1 million
Coronavirus Response Fund and donated £5 million to the Prince’s Trust fund for
supporting young entrepreneurs across the UK affected by the crisis.
We increased the number of frontline staff to support customers and introduced a
range of digital solutions to adapt to changing customer needs. We provided further
support for customers through Tyl, our merchant acquiring and payments solution,
Mentor Live, our digital business support service, and Free Agent, our award-winning
online accounting software.
Supporting our areas of focus:
• Learning: We supported the British Chamber of Commerce with their
‘Restart Renew Rebuild’ campaign to champion economic recovery
and we welcomed a new cohort of apprentices into our Social Mobility
Apprenticeship Programme with the Leadership Through Sports and
Business charity.
• Enterprise: We launched the digital business builder platform
supporting start-ups and new businesses with access to learning
resources, successfully reaching over 14,200 registrations, with
58% of those supported identifying as female. We also digitised
our Dream Bigger programme, to support the next generation of
female entrepreneurs.
Our Entrepreneur Accelerators pivoted to a digital model, delivering over 10,000
bespoke coaching sessions as well as hosting 1,016 digital events reaching 45,782
attendees. In September 2020 we were endorsed by the Scale Up Institute and
named as the ‘UK’s leading accelerator’ by Beauhurst.
• Climate: As a leading lender to the UK renewables sector, we
supported £3.9 billion of Climate and Sustainable Funding and
Financing in 2020 and are proud to support de-carbonisation in the
UK. In October 2020, we launched a NatWest Climate Accelerator
to provide support, coaching and access to our Climate Partner
Panel for our businesses whose core offering is linked to sustainable
environmental activities.
As a testament to our passion for innovation, we won a range of awards in 2020: Payit,
an Open Banking solution for e-commerce payments settlement launched in June and
won the prestigious ‘Innovation Frontier Award’ at Celent Model Bank 2020; and Rapid
Cash, our digital working capital solution won best ‘Innovation in the SME Finance
Sector’ at the 2020 Business Moneyfacts awards.
£13.8bn
approved UK Government
scheme lending.
Challenging operating conditions, the low interest rate environment and subdued
business activity due to COVID-19 resulted in a £399 million operating loss, including
impairment losses of £1,927 million and £37 million fair value and disposal losses.
Net loans to customers were £7.0 billion, or 6.9%, higher than 2019 as £12.6 billion UK
Government scheme drawdowns were partially offset by increased loan provisions and
lower specialised business lending.
38
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Start. Scale.
Succeed.
Note:
(1) By total number of
attendances, Beauhurst –
September 2020.
In 2020 the NatWest Entrepreneur Accelerator
Programme was recognised as the No.1 UK
accelerator programme.(1)
Entrepreneur Accelerator is our flagship programme, fully-funded by NatWest Group,
to support high growth-potential businesses with ambitions to scale across the UK. We
focus on giving entrepreneurs the best possible coaching, in world-class environments,
while connecting them to our amazing networks.
Since the beginning of the pandemic we have run 1,016 virtual events, with 45,782
attendees. By moving our Accelerator Programme from face-to-face to digital delivery,
we continued to support our entrepreneurs at a time when they need us most.
We are committed to creating and supporting new businesses and concentrate our
efforts on under-represented groups and geographical inequality. The programme has
supported 1,230 entrepreneurs, of which 43% were female, 18% were of Black, Asian
and Minority Ethnic backgrounds and 81% were outside London and the South East of
England. The resulting businesses have raised total investment of £56 million, generating
£128 million of total turnover and creating more than 1,000 jobs.
To support SMEs and entrepreneurs nationwide, we launched the ‘In Conversation With’
series. Available to both customers and non-customers alike, the series gives the UK’s
six million SMEs an opportunity to hear directly from some of the most influential voices
in industry. We hope the inspiration provided by these experts, alongside our full range of
support, will help SMEs and entrepreneurs to survive, thrive and prosper in the wake of
the unique challenges of 2020.
39
Building a purpose-led bank
Private
Banking
Total
income (£m)
Operating
expenses (£m)
Impairment
(losses)/releases
(£m)
Operating
profit (£m)
2020
2019
763
777
(455)
(486)
(100)
6
208
297
Net loans to
customers (£bn)
17.0
15.5
AUMAs (1) (£bn)
32.1
30.4
Return on
equity (%)
10.3
15.4
Risk-weighted
assets (£bn)
10.9
10.1
(1) Private Banking manages assets under
management portfolios on behalf of
Retail Banking and RBSI and receives a
management fee in respect of providing
this service
(2) Comparisons with prior periods are
impacted by the transfer of the Private
Client Advice business from Retail
Banking from 1 January 2020. The net
impact on full year 2019 operating profit
would have been to increase total income
by £44 million and other expenses by
£8 million. The net impact on the Q4
2019 balance sheet would have been to
increase customer deposits by £0.2 billion.
Variances in the financial commentary
have been adjusted for the impact of this
transfer.
(3) For the period from 1 January 2020
to 30 June 2020, with a baseline of
31 December 2019.
29% (3)
average reduction in
the carbon intensity
of equity in our Asset
Management business.
Our relationship-led and digitally enabled strategy has ensured
ongoing support to our clients through the COVID-19 crisis. We
have led with purpose, improving client satisfaction scores to
new highs, increasing client engagement and progressing on
our climate commitments. Our newly formed relationship with
BlackRock will support our investment management processing
activity and enable savings to be passed on directly to our clients.
We reacted quickly in the early stages of the COVID-19 crisis, supporting our most
affected clients through the provision of mortgage and personal loan repayment
deferrals in appropriate circumstances and by approving over £0.3 billion in UK
Government scheme lending in 2020. Targeted training ensured appropriate steps were
taken to meet regulatory standards whilst enabling us to continue to meet client needs.
Supporting our areas of focus:
• Learning: Our award-winning Coutts Institute continued to support
clients with their philanthropic needs. In 2020, we supported over 230
clients with a fraud awareness webinar and more than 4,000 clients
attended our live ‘Coutts in Conversation’ speaker series. Internally,
we launched a mentor scheme for our Black, Asian and Minority
Ethnic colleagues and provided 220 frontline colleagues with sales
skills training, using psychology and behavioural science.
• Enterprise: We have supported Entrepreneur clients through
a dedicated service which provides capital and connections to
business founders. Coutts Investment Club introduces financially
sophisticated high net worth individuals to private companies, and
in March 2020 agreed to collaborate with the Business Growth
Fund (BGF) to develop the UK Enterprise Fund.
• Climate: In September 2020, Coutts became a signatory of the
Green Finance Institute’s Green Home Retrofit principles and in
November 2020 launched the Green Mortgage pilot, which will
support our commitment to ensuring 50% of our clients’ homes
achieve at or above EPC or equivalent rating C by 2030. Our Asset
Management business reduced the carbon intensity of equity in its
portfolios by an average of 29% (3), ahead of our 25% target
reduction by 2021 and is on track to meet our target to reduce the
carbon intensity across all portfolios by 50% by 2030, in line with
the Intergovernmental Panel on Climate Change (IPCC) targets.
In August 2020 we received an A+ accreditation from the Principles for Responsible
Investment, the United Nations’ supported international network of investors, and in
November 2020 Coutts received The Financial Times’ Banker Magazine and Professional
Wealth Management award for best Private Bank for Millennials. Coutts is also currently
working towards achieving Benefit corporation (B-corp) accreditation; having both
changed its Articles of Association and begun measuring progress according to the
B-Corp impact assessment in 2020.
Operating profit of £208 million was 37.5% lower than in 2019, primarily reflecting the low
interest rate environment and impairment losses of £100 million. Net loans to customers
increased by £1.5 billion, or 9.7%, and customer deposits increased by £3.8 billion, or
13.3%, compared to 2019. AUMAs increased by £1.7 billion, or 5.6%, reflecting positive
investment performance of £0.9 billion and net new money inflows of £0.8 billion, which
were impacted by EEA resident client outflows following the UK’s exit from the EU.
40
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
How Coutts
and its clients
are making a
difference
A sustainable and responsible approach to investing
is important because it can build a better world –
and who doesn’t want that?
In our first annual sustainability report Coutts show how we invest with purpose and
integrity, and with a keen focus on sustainability. Coutts do it a little differently to
many other investment houses. Others tackle it by providing one ethical investment
product, but Coutts embed this thinking across our entire investment process and
offering for all our clients. So those who invest with Coutts choose to fight against
climate change, promote diversity and establish good working conditions for all.
And crucially, it doesn’t cost our clients a penny.
2020 was Coutts second year as a signatory to Principles for Responsible
Investment (PRI), a world-wide body that aims to address ESG issues and the role
that investors can play in supporting this work. PRI makes an annual assessment of
all signatories, which allows for comparisons with other investment managers at a
local and global level.
Coutts either improved or sustained our scores across all categories relative to 2019.
Our Strategy and Governance score of A+ is the highest rating possible, higher than
the industry median rating of A. This category rates an organisation's overarching
approach to responsible investment and incorporation of ESG issues into its asset
allocation, recognising the action Coutts are taking to create a better future.
41
Building a purpose-led bank
RBS
International
(RBSI)
We have accelerated our digital transformation to suit
changing customer needs. Leading a digital transformation
across the communities we operate in and becoming a
bank that is easy to deal with is the best way to fulfil Our
Purpose to champion potential.
Total
income (£m)
2020
2019
497
610
Operating
expenses (£m)
(291)
(264)
Impairment
losses (£m)
Operating
profit (£m)
(107)
(2)
99
344
Net loans to
customers (£bn)
13.3
14.1
Risk-weighted
assets (£bn)
7.5
6.5
Return on
equity (%)
6.1
25.7
We have worked closely with local governments to implement emergency policies to
support local communities and businesses in light of COVID-19. We led the offshore
banking sector in the creation of the loan Disruption Guarantee Scheme (DGS),
providing financial support to our customers, with loan facilities totalling £858 million,
through forbearance, the DGS and payment holidays in 2020.
We have accelerated our digital transformation strategy and are now meeting the increasing
customer demand for digital solutions. This change in customer behaviour has also led us
to consolidate the branch network in our locations and allowed us to focus more investment
into digital services. In 2020 eQ, our multicurrency banking platform for Corporate and
Institutional banking customers, released online account opening and a mobile app.
Supporting our areas of focus:
• Enterprise: In July 2020 we introduced the Woman in Business
accreditation, with 46 colleagues completing the qualification. In
tandem we nominated nine customers for the NatWest Everywoman
Awards, championing their potential and helping to remove the
barriers to business.
In the second half of 2020 we selected six local, social enterprises to
support with mentoring, sharing our knowledge and resources with our
communities. We also held three virtual Business Builder events which
were open to anyone in the community, a first for RBS International.
We had 93 attendees, with a third signing up for further support.
• Climate: We continue to help drive the transition towards a low
carbon economy. In the fourth quarter of 2020 we provided a €5
million investor backed loan facility (IBLF) for an energy transition
fund focusing on clean energy production, energy efficiency
enhancements and clean energy utilisation. We also provided a
€30 million IBLF for a European fund; that invests in the development,
construction and management of subsidy-free and sustainable
renewable energy assets.
68%
Local Banking customers
now registered with digital
banking, +8 percentage
points on 2019.
Throughout 2020 we have sought to increase customer and colleague knowledge on
climate by running education sessions on sustainability-linked loans, holding a Climate
Awareness month and by enrolling over 100 colleagues on climate education courses;
in conjunction with the University of Edinburgh and Cambridge Institute of Sustainability
Leadership.
Operating profit of £99 million was 71.2% lower than 2019 primarily due to the impact of
interest rate reductions on deposit income, lower fee income and increased impairment
losses reflecting the economic response to COVID-19. Net loans to customers decreased
by £0.8 billion, or 5.7%, as Institutional Banking customers repaid facilities to position
themselves in the uncertain environment.
42
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Building for
the future
Through the strong relationships RBSI has built
with housing trusts, developers and the local
government on Jersey, RBSI is playing a leading
role in tackling the issue of overcrowded
accommodation on the island of Jersey.
Lending provided by RBSI continues to support the development of social housing,
affordable housing and first-time buyer properties in Jersey. And over the course
of 2020, we went further, providing lending facilities totalling £92 million to support
the building of homes for islanders, working with Les Vaux Housing Trust, CTJ
Housing Trust and Andium Homes.
By supporting the expansion of accessible and affordable housing on the island,
we are demonstrating our commitment to championing the potential of Jersey
residents. We know that increasing residents’ opportunities to have a place of
their own to call home will help to build an even stronger and more empowered
island community.
NatWest Group has committed to £3 billion of new funding to the housing
association sector by the end of 2022 to increase the provision of social housing,
as well as to improve existing properties, ensuring that more people and families
can have a sanctuary they can call home.
43
Building a purpose-led bank
NatWest
Markets
We have played a key role in supporting NatWest Group’s
customers during 2020. We have remained resilient in the
face of volatile market conditions, delivering strong income
performance and safely managing our balance sheet while
continuing to support customers through the COVID-19 crisis.
Total
income (£m)
Operating
expenses (£m)
Impairment
(losses)/releases
(£m)
Operating
loss (£m)
2020
2019
1,123
1,342
(1,310)
(1,418)
(40)
51
(227)
(25)
Significant progress has been made in reshaping the business for the future and
advancing our transformation to deliver the refocused business announced in February
2020. By accelerating this transformation we’re becoming a more integrated and
sustainable part of NatWest Group, focusing on what we do best and what matters to
our customers. RWAs have reduced and the business is ahead of its plan to achieve the
medium-term reduction to £20 billion.
We simplified our product offering and in the second quarter of 2020 we entered into
an agreement with BNP Paribas for the provision of ‘house’ Futures and associated
back office services. We have consolidated certain customer coverage, services and
functional teams with their counterparts in NatWest Group, enhancing our collaborative
approach to customers.
Funded assets
(£bn)
105.9
116.2
Risk-weighted
assets (£bn)
26.9
37.9
We leveraged our risk management expertise to support required hedging for customers;
helped governments access critical financing to support their pandemic response
programmes and supported customers’ access to capital markets, including issuing
COVID-19 response bonds and accessing the Covid Corporate Financing Facility (CCFF)
in conjunction with Commercial Banking.
(1) The NatWest Markets operating segment
is not the same as the NatWest Markets
Plc legal entity (NWM Plc) or group (NWM
or NWM Group). For 2019, NWM Group
includes NatWest Markets N.V. (NWM
N.V.) from 29 November 2019 only. For
periods prior to Q4 2019, NWM N.V. was
excluded from the NWM Group. In both
2019 and 2020 the NatWest Markets
segment excludes the Central items &
other segment.
(2)
Includes all green, social, sustainability
and transition labelled debt.
In support of our Climate focus area we have continued to play a leading role in the
development of the sustainable finance market through 2020. We supported Cadent Gas
on the UK’s first ever transition bond as bookrunners for the deal, supporting the UK’s
transition towards a low carbon economy.
Our commitment to clients has been recognised by a number
of awards and surveys in 2020 including:
• UK Corporates FX Service Quality Leader (Greenwich Associates, Global FX-Study,
UK Corporates, 2019, awarded April 2020)
• #1 European Government Bonds by Estimated Notional Share –
Gilts (Greenwich Associates European Fixed Income Rates 2020)
• Most Impressive FIG House in Sterling (GlobalCapital Bond Awards 2020)
• #1 lead manager for sustainability-labelled debt for UK corporates (2)
(Dealogic, full year 2020)
• Most Accurate UK Economy Forecaster of 2019 – Ross Walker
(Consensus Economics, awarded May 2020)
£7.2bn
Climate and Sustainable
Funding and Financing in 2020.
An operating loss of £227 million compared with a £25 million operating loss in 2019,
mainly reflecting the £444 million Alawwal bank merger gain in 2019 and £48 million
higher disposal losses in 2020, partially offset by stronger business performance in the
current year from increased customer activity as the market reacted to the spread of
the COVID-19 virus. RWAs decreased by £11.0 billion to £26.9 billion as the business
exceeded its target for RWA reductions over the course of 2020.
44
Building a purpose-led bank
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Supporting the
construction of
the world’s
largest offshore
wind farm
(1) Source: Inframation
Deals (Acuris). Based on the
aggregated totals for the United
Kingdom for the 10 year period
03/12/2010-03/12/2020.
In 2020, NatWest Group delivered £12 billion of climate
sustainable funding and financing to customers against
our target to deliver £20 billion by the end of 2021.
We are committed to tackling climate change, which is a core part of Our Purpose-led
strategy and seek opportunities to demonstrate our leadership and contribution to a
cleaner energy future.
In 2020, NatWest Group acted as a lead arranger for the financing of the first two phases
of Dogger Bank Wind Farm. Upon completion of all three phases in 2026, Dogger Bank
Wind Farm will be the largest offshore windfarm in the world. The project is being
developed by SSE, a leading developer, owner and operator of renewable energy across
the UK and Ireland together with Norwegian firm Equinor, a leading energy provider,
with each holding a 50% stake.
Located over 130km off the north east coast of England, by 2026 Dogger Bank Wind
Farm will support 320 new skilled jobs and produce enough electricity to supply 5% of the
UK's demand - equivalent to powering six million UK homes each year. NatWest Group
acted as a lead arranger of the transaction for the financing of the first two phases,
comprising 29 banks and three export credit agencies providing £5.5 billion of financing
facilities, making this the largest offshore wind project financing to date, globally.
Renewable energy is a strategically important sector for NatWest Group, Dogger Bank
marked our ninth offshore wind project finance transaction in the UK in the past four years.
We have been the number one provider of finance to the UK renewables sector over the
last 10 years – by total number of transactions over that period – with 79 transactions
totaling £3.86 billion (1), supporting more than 8GW of offshore wind development.
45
Our stakeholders
Stakeholder
engagement.
Listening, engaging and partnering with
stakeholders helps us to address our business
impacts and improve outcomes for customers,
society and the environment.
Who
Our stakeholders
How
How we engaged with them in 2020
Customers
Our retail, business, commercial and
institutional customers.
We pivoted our operations at pace in
response to COVID-19, reacting quickly to
support our customers’ financial health.
Colleagues
Our colleagues, who create and deliver
products and services and are the face
of our brands.
We placed colleague wellbeing firmly at
the centre of our COVID-19 response.
We engaged with our customers face-to-face through our branch network,
mobile branches, community bankers and business growth enablers. We
also engaged digitally through webchats, Bankline, video banking, secure
messaging and social media, in addition to telephony. We have prioritised
providing a personal service to customers through these challenging times
and ensured that customers were able to tell us about their experience by
providing feedback through our customer surveys, including our Net Promoter
Score survey framework, as well as syndicated surveys and customer
listening focus groups for senior leadership. Our closed loop feedback and
complaints system allowed us to identify and resolve issues quickly.
The Our View opinion survey provided colleagues an opportunity to have their
say on how it feels to work at NatWest Group and to shape the actions we take
to champion potential. During the pandemic we ran additional COVID-19 pulse
surveys to understand how colleagues were feeling and what more we could
do to support them. Amidst the global events of 2020, we conducted our first
survey on race, diversity and inclusion, to inform our approach in creating a
truly inclusive organisation. The Colleague Advisory Panel allowed the Board
to hear directly from colleagues on key issues, while Employee Led Networks
continued to influence how NatWest Group is becoming more inclusive
and accessible. Important conversations continued with our employee
representatives, such as trade unions and work councils.
Communities
The communities in which we operate,
and wider society.
We worked with community partners and
charities to support our local communities,
helping the most vulnerable in society.
We regularly shared information about NatWest Group and its Purpose-led strategy,
providing opportunities for our communities to engage with our colleagues and
customers. We were in constant contact with our communities, including through
our regional boards, leveraging existing and forming new relationships to support
society. Examples of how we engage with and support our community partners
and charities include payroll giving, community cashback, employee fundraising,
employee volunteering, ATM giving and disaster and emergency appeals.
Investors
Institutional equity and debt investors, UK
Government, retail shareholders.
Our investors take an interest in our success
and sustainability, and we updated them
regularly on business performance.
We engaged with our retail shareholders through our Annual General
Meeting, virtual shareholder events, and our Annual and Strategic Report
communications. We interacted with institutional investors through
quarterly results presentations, 1:1 and group meetings, including sessions
with the Board, regular engagement with UK Government Investments and
presentations at sector conferences. We engaged with socially responsible
investors through an active programme of meetings with ESG analysts
from institutional investors, presentations at ESG-focused conferences and
enhanced engagement with sustainability rating agencies.
Regulators
Our regulators, who oversee our
activities and undertake consultations
and policy reform.
We continued to prioritise an open and
continuous dialogue with our regulators.
Suppliers
Our suppliers, who support us to deliver
products and services to our customers.
Suppliers have played a critical role in
ensuring continuity of service to our
customers during the pandemic.
We actively monitored changes in the regulatory landscape and
engaged with regulatory consultations and on compliance with
regulatory changes. We also attended regulatory engagement
meetings on an ongoing basis.
We organised regular review meetings with key suppliers and regularly
conducted supplier policy compliance reviews.
46
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Our stakeholders
Our approach to stakeholder engagement in 2020 was significantly influenced by the COVID-19 pandemic. The table below sets
out our key stakeholder groups, together with illustrative examples of how we engaged with them (both formally and informally),
what we discussed and related outcomes, including where further information can be found. On our website we publish an
extended version of this table which includes more details on our engagement activity with consumer groups, journalists, social
media influencers, politicians, governments and other agencies, NGOs, academics and think tanks. Our 2020 ESG supplement,
which is expected to be published in March 2021, includes a selection of stakeholder engagement case studies. Our section 172(1)
statement on pages 48 to 52 sets out how stakeholder interests have influenced Board discussions and decision-making.
What
What we discussed
Outcomes and further information
What we did
• COVID-19 and the support
needed.
• Customer satisfaction and trust.
• Lending, including fees and
charges.
• Supporting businesses.
• Supporting customers in
financial distress.
• Accessible banking.
• Security and fraud.
• Set up dedicated telephone lines for over-70s and NHS workers.
• Helped 258,000 customers secure a mortgage repayment holiday.
• Implemented Bounce Back Loan Scheme and Coronavirus Business Interruption Loan Scheme and waived fees.
• Removed the minimum monthly fee on our business accounts.
• Launched an online cashflow tool to help businesses through the pandemic.
• Introduced case owners to improve the account-opening journey.
Further information:
• Our Customers, pages 53-56.
• Supporting our customers, colleagues and communities, page 22.
• Support for colleagues and
• Home working was quickly made available to most colleagues, and for keyworker colleagues
their families through COVID-19.
who remained on the frontline, all of our offices and branches were made COVID-secure.
• Wellbeing of customers,
colleagues and communities.
• Becoming an inclusive
organisation.
• Living Our Purpose.
• Progress against our strategy.
• Set up a COVID-19 Wellbeing Hub for colleagues which received over 37,500 hits.
• Our View showed a further improvement in colleague sentiment.
• Our work on inclusion has been recognised through a number of external awards.
• We continue to support our c.23,000 – strong Employee Led Networks.
Further information:
• Our Colleagues, pages 57-61.
• Colleague Advisory Panel, page 49.
• Supporting our customers, colleagues and communities, page 22.
• Requests to raise awareness of
charities, and enable employee
volunteering and fundraising.
• Support with customer giving.
UK and international disasters
•
and emergencies response.
• Climate and conservation
activity.
• COVID-19: economic impact
and customer focus.
• Progress against purpose
and strategy.
• Financial performance.
• Dividends and share price.
• Climate change and
sustainable lending.
• Our Edinburgh head office was turned into a charity distribution hub.
• Over £3.2 million was raised for charity and 13,599 hours volunteered during worktime.
• Facilitated customer donations of £2.1 million through our Reward Account.
• Over £10 million was raised for the National Emergency Trust’s (NET) Coronavirus Appeal through colleagues
and customer donations and matching from the bank.
• 30,000 trees were planted in a pioneering “tiny forest” in Dagenham with TCV (The Conservation Volunteers).
Further information:
• How We Create Value, pages 30 and 31.
• Supporting our customers, colleagues and communities, page 22.
• Climate-related financial disclosures, pages 69 to 83.
• 2020 ESG supplement expected to be published in March 2021.
• Due to COVID-19, the 2020 AGM was attended by only the shareholders required to form a quorum.
Shareholders were able to vote and submit questions in advance of the AGM. Positive feedback was
received on three virtual shareholder events held in 2020.
• Mainstream investors received strategic and financial updates to enable them to make their investment
decisions. The Board received feedback from investors on performance and strategy.
• Our position in sustainability benchmarking indices improved and we were the first UK bank to list a green
bond on the London Stock Exchange (LSE).
Further information:
• How the Board engaged with investors, page 50.
• Virtual shareholder events: natwestgroup.com/investors.
• COVID-19 support measures
• Responded to various consultations and other requests for comment/input issued by government,
and recovery.
• Brexit.
• ESG issues.
• Operational resilience.
• Access to cash.
• Consumer credit.
regulatory and standard setting bodies.
• Engaged with regulators during the policy proposal phase on a number of occasions to help inform
priorities – examples included climate change and operational resilience, both of which are being
considered in new ways.
• Directors and senior management had regular engagement meetings with regulators to discuss key
regulatory priorities.
• We requested forbearance across a number of regulatory change programmes as a result of implementing
government schemes at pace to support our customers.
Further information:
• Section 172(1) statement, page 51.
• Environmental and ethical
sustainability.
• Innovation.
• Prompt payment.
• Being simpler to do
business with.
• Launched our Supplier Charter, which sets out our aims and expectations in the areas of ethical business
conduct, human rights, environmental sustainability, diversity and inclusion, the Living Wage and prompt
payment. To support the Supplier Charter and our collaborative approach to improving performance
in these areas, we identified and onboarded a new third party provider to undertake independent
sustainability assessments of our suppliers – EcoVadis.
• To support our Supply Chain during the COVID-19 pandemic and beyond, we moved all UK and Ireland
supplier payments to immediate release, to support all of our suppliers, including SMEs.
• Embedded a new supplier management system, simplifying how we engage with our supply chain.
Further information:
• Section 172(1) statement, page 51.
47
Our stakeholders
Section 172(1)
statement.
In February 2020 the Board approved
its annual objectives and confirmed the
Board’s key stakeholder groups, as set
out in this statement.
This section of the Strategic Report
describes how the directors have had
regard to the matters set out in section
172(1) (a) to (f), and forms the directors’
statement required under section 414CZA,
of the Companies Act 2006.
How stakeholder interests have influenced
Board discussions and decision-making
NatWest Group plc recognises the
importance of engaging with stakeholders
and understanding their views, to help
inform its strategy and Board discussions
and decision-making.
Relevant stakeholder interests, including
those of colleagues, customers, suppliers
and others are considered by the Board
during its discussions and when it takes
decisions. We define principal decisions
as those that are material, or of strategic
importance to the company, and also those
that are significant to NatWest Group’s
key stakeholder groups as set out on pages
46 to 47.
In making its decisions, the Board considers
the outcomes of relevant stakeholder
engagement, as well as the need to maintain
a reputation for high standards of business
conduct, the need to act fairly between the
members of the company and the long-term
consequences of its decisions.
The case studies included in this statement
(refer to pages 51 and 52) provide examples
of how stakeholder interests and the factors
set out in section 172(1) of the Companies
Act 2006 have been considered in Board
discussions and principal decision-making
during 2020.
Various steps were taken during the year to embed our purpose in Board
discussions and decision-making, helping the Board to ensure different
stakeholder needs were considered. The roles and responsibilities of the
Board and its Committees were enhanced to ensure a strong focus on our
purpose was built into their respective Terms of Reference. Board and Board
Committee papers now include a dedicated section which explains how
the proposal or update aligns to our purpose, which is complemented by a
section detailing stakeholder impacts. These features, embedded within
our Board paper format, help to ensure that our purpose and stakeholders
remain firmly at the centre of Board discussions, and underpin the Board’s
oversight of NatWest Group’s progress and performance as a purpose-led
organisation. During the 2020 Board evaluation, directors commented
positively on how our purpose guided Board discussions and decision-
making during the pandemic.
The majority of the Board’s planned direct engagement activity with
stakeholders was unfortunately cancelled in 2020, due to COVID-19
restrictions. Virtual alternatives were arranged where feasible, and
directors were kept informed about stakeholder engagement activity
which was taking place at an operational level via regular and focused
management reporting. Further details are set out below and in the
stakeholder engagement section on pages 46 to 47.
Customers
During the year, the Board received regular updates on customer issues
through reports from the Group CEO and business CEOs. Customer lifecycles
were a key area of focus during Board and Group Executive Committee
(ExCo) strategy discussions. Directors also received targeted management
information on progress against customer service metrics including customer
advocacy measures and complaints data. A dedicated Board session on
customer experience helped to enhance directors’ customer insights further.
This session covered NatWest Group's Net Promoter and CMA scores and
directors provided input and feedback on management's plans to enhance
customer experience outcomes. Directors were also regularly updated on the
nature and extent of COVID-19 support provided to customers.
The Group CEO and Group CFO met with customers throughout the year to
enhance relationships and understand their views.
The Group Sustainable Banking Committee held two sessions that included
a focus on customers. The first of these addressed customer treatment in
the context of COVID-19. The second session focused on enterprise, and the
Committee heard customer testimonies alongside a spotlight from a customer
on entrepreneurship and NatWest Group’s role in supporting the sector.
Colleagues
Colleague Advisory Panel
Our Colleague Advisory Panel (CAP) provided an important two-way
communication channel between the Board and colleagues during the
pandemic.
The CAP was set up in 2018 to help promote colleague voices in the
boardroom and supports our compliance with the UK Corporate
Governance Code in relation to workforce engagement. Its membership
includes representatives from a range of our Employee Led Networks,
unions, management teams and regional locations, as well as volunteer
48
Our stakeholders
June CAP meeting
Board attendees: Lena Wilson (CAP Chair), Alison Rose
(Group CEO), Morten Friis and Yasmin Jetha (NEDs).
Topic discussion: Alison Rose facilitated a broad-ranging
discussion to check in on COVID-19 colleague support.
Panel members expressed positive feedback on provision
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Agenda topics
suggested by
the Panel/views
requested by
the Board
Feedback
provided back
to the panel
after the Board
by the Chair
Board engaging
directly with
the workforce
Meet and
discuss/views
shared
Summary of
views shared
with the Board
by the Chair
of working from home support and
pace of its delivery; and highlighted
particular challenges for front-line
staff with caring responsibilities.
July Board
CAP Chair presented a formal
written report to the Board and
Directors discussed the Panel's views.
The Colleague Advisory Panel
feedback loop in action
Topic:
COVID-19 colleague support
Follow up
July: CAP Chair met with
Panel members to feed back
Board views.
September: At the next CAP meeting, Panel members
were encouraged to share CAP discussions through
relevant channels.
Future CAP meetings: CAP views
on returning to the office to be considered in future
agenda planning.
Directors welcomed CAP feedback on COVID-19
colleague support and said CAP views on colleagues'
return to the office would be useful in future.
Directors agreed CAP members should be
encouraged to share CAP discussions through
their own internal networks.
members unconnected with existing groups. It continues
to provide a valuable mechanism for colleagues to gain
a greater understanding of the Board’s role and provide
feedback to directors. Two-way communication is crucial
for both colleagues and directors and embodies our open
and inclusive culture. The CAP met four times in 2020 and
all meetings were virtual. In addition to two scheduled
sessions, there were two ad-hoc sessions which supported
additional listening and discussion with directors in light of
the challenges related to COVID-19.
Topics discussed in 2020 in addition to COVID-19 colleague
and customer support included embedding purpose,
diversity and inclusion, innovation, executive pay and
sustainable banking.
At Board meetings the CAP Chair provided an update on
issues discussed at the CAP, and raised specific questions
for Board feedback. Afterwards, the CAP Chair shared the
Board's views and feedback with CAP members. The diagram
above illustrates the CAP feedback loop in action, on the topic
of COVID-19 colleague support.
Our culture
The Board assesses and monitors NatWest Group’s culture in
several ways. In February 2020, representatives from the
Banking Standards Board (BSB) joined a Board meeting to
present the results of their 2019 industry-wide survey and
thematic reports, together with their 2019 Assessment
report on NatWest Group. The Board also discussed an
internal review of the BSB’s thematic reports on “Technology
& Culture” and “Decision-Making” from a NatWest Group
perspective, including impacts for customers and employees.
In December 2020, the Group Sustainable Banking
Committee considered a summary of the results of the BSB’s
2020 Assessment report on NatWest Group, in advance of a
presentation by the BSB to the Board in February 2021.
The Group Sustainable Banking Committee held a dedicated
people and culture session in December 2020 which included
culture measurement reporting, and this in turn helped
to support the Board on assessing progress on building a
healthy culture, and alignment between culture and purpose
across NatWest Group.
For further information on the work of the Group Sustainable
Banking Committee, refer to pages 116 to 117.
Colleague opinion survey results were another useful culture
oversight tool available to the Board. Directors considered
the results of colleague pulse surveys conducted in May and
June 2020, and in October 2020, reviewed the results of
the annual colleague opinion survey, Our View. Key themes
noted and discussed by the Board were culture, inclusion,
capability, resilience and wellbeing (including financial
wellbeing and colleague advocacy).
In December 2020, as part of a spotlight on colleagues, the
Board received an update on future ways of working and
how this might evolve in a way that is consistent with our
purpose and strategy; continues to support colleagues;
drives greater collaboration; and supports the long-term
sustainability of NatWest Group.
Executive talent and succession
The Board is committed to staying connected with the
executive talent population. Although COVID-19 restrictions
meant that a planned face to face event for directors to
meet senior management colleagues considered to be
‘rising stars’ was cancelled, a virtual session enabled this
group to spend time together. Discussion topics included
49
Our stakeholders
How the Board engaged with investors
January
February
March
April
14th – 2019 annual results announced;
investor presentation + Q&A
29th – Annual General Meeting
& virtual shareholder event
Institutional investor meetings (Group CEO and Group CFO)
Corporate Governance meetings with investors (Chairman)
August
July
June
May
Institutional investor meetings
(Group CEO and Group CFO)
16th – virtual shareholder event
1st – Q1 results announced;
investor presentation + Q&A
31st – H1 results announced;
investor presentation + Q&A
Institutional investor meetings
(Chairman, Group CEO and Group CFO)
September
8th – virtual shareholder event
30th – Board feedback session with
three major institutional investors
Institutional investor meetings
(Group CEO and Group CFO)
October
November
December
30th – Q3 results announced;
investor presentation + Q&A
Corporate Governance meetings
with investors (Chairman)
Institutional investor meetings
(Chairman, Group CEO and Group CFO)
how we could continue our momentum towards becoming
a purpose-led organisation, and future opportunities for
NatWest Group. The Board also held a separate session to
discuss executive succession planning.
remuneration policy and updated the Board on those
discussions. Further details on remuneration engagement
can be found in the Directors’ remuneration report on
pages 119 to 146.
For further details on colleague engagement and how we
are building a healthy culture, refer to pages 57 to 61.
Investors
Our directors engaged with investors throughout the
year, keeping them informed on our progress, strategy
and financial performance. This helped the Board to build
an understanding of what matters to our investors, and
provided useful opportunities for questions and feedback.
The timeline above provides an overview of key investor
engagement activities during 2020.
Communication with NatWest Group plc’s largest
institutional shareholders continued throughout the year as
part of the Investor Relations programme. The Chairman,
Group CEO and Group CFO undertook an extensive
engagement programme with our largest institutional
shareholders, including UK Government Investments
(UKGI). Members of the executive management team also
took part in meetings with groups of institutional investors
for sessions spotlighting their businesses. The Group
CEO and Group CFO made additional outreach to major
shareholders, ensuring they were kept up to date during the
uncertainty caused by COVID-19, and virtual engagement
activity was significantly stepped up in the absence of face
to face options.
The Chairman’s regular engagement with major
shareholders allowed him to understand their views on
governance and performance against strategy. The
Chairman of the Group Performance and Remuneration
Committee met with institutional shareholders to discuss
remuneration matters, including the executive directors'
The Board met virtually with representatives from three
of our top 30 institutional shareholders, which provided
our investors with an opportunity to give feedback and
ask questions of the wider Board. Topics covered included
our purpose, strategic priorities, dividends and capital. In
addition, our Board Committee Chairs met with UKGI, who
were undertaking a deep dive into the business as part of
their stewardship responsibilities to the UK Government.
Following each quarterly results announcement, executive
management hosted an investor presentation in order
to provide an update on our financial performance and
strategy.
All shareholders usually have the opportunity to ask
questions at our Annual General Meeting (AGM) and any
other General Meetings which may be held. In 2020 our
AGM was held behind closed doors in accordance with
requirements put in place in response to the COVID-19
pandemic, with only employee shareholders present to
meet quorum requirements. We held an online shareholder
event later in the day to allow shareholders to receive
answers to pre-submitted questions.
We also continued to hold online retail shareholder events,
where shareholders could ask questions submitted in
advance or live on the day of a panel of executives and
non-executive directors and learn more about the business,
our progress to date and our plans for the future. In addition
to the virtual event held following the AGM we held two
more online events during 2020. The first took place in July
2020, hosted by the Group CEO and covered our response
to the COVID-19 pandemic and the launch of our purpose.
50
Our stakeholders
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
A second event held in September 2020 hosted by the
Chairman covered our half-year financial results. We plan
to hold further similar events in 2021.
Throughout the year, the Chairman provided regular
updates to the Board on shareholder engagement and the
Board also received regular updates on investor feedback
from the Group CEO, Group CFO and Investor Relations at
Board meetings and strategy sessions.
Combined, these activities helped to ensure that the Board
as a whole maintained a clear understanding of the views
of all shareholders, and that directors continued to have
regard to the need to act fairly as between members of the
company in performing their duties, as required by section
172(1).
Regulators
The Board recognises the importance of open and
continuous dialogue with our regulators. In 2020, the
main focus of our regulatory engagement was inevitably
on our COVID-19 response, and in particular the support
we were offering to our customers, with other topics
discussed by directors with the regulators including
strategy, operational resilience, board effectiveness,
dividends and financial crime.
Representatives from the Prudential Regulation Authority
(PRA) attended the July 2020 Board meeting to present
and discuss the findings arising from its Periodic Summary
Meeting for NatWest Group. In September 2020,
representatives from the Financial Conduct Authority (FCA)
joined the Board meeting to present and discuss its annual
Firm Evaluation letter.
The Chairman and executive directors have regular
meetings with the PRA and FCA. In addition, individual
non-executive directors engage with our regulators through
Continuous Assessment and Proactive Engagement
meetings. The Board also receives reports on regulatory
matters from the Chief Legal Officer and General Counsel.
Suppliers
The Board is mindful of the role our suppliers play in
ensuring we deliver a reliable service to our customers, and
of the importance of our relationships with key suppliers,
particularly in the current environment.
Although directors were unable to meet with supplier
representatives in person, as they have done previously,
they were kept informed on progress against relevant key
performance indicators, including payment practices,
through management reporting. In particular, the Board
Changing our Name
In February 2020 we announced our intention to change the company’s name
from The Royal Bank of Scotland Group plc to NatWest Group plc. The Board
fully supported the move to align the parent company name with the brand under
which the majority of our business is delivered but was also mindful of a range of
stakeholder interests and how the announcement would be received, particularly
from a Scottish perspective.
In advance of the announcement, the Board considered both the rationale for
changing the name as well as the potential impact of the name change for key
stakeholder groups, particularly colleagues, customers and investors.
The Board noted that changing the parent company name and brand would help
remove the negative impact the RBS brand has had on the performance of our
customer brands following the financial crisis of 2008. The Board acknowledged
the potential long-term commercial benefits from doing this and, in particular, that it would allow us to move on from our
legacy issues and focus on our customers and continuing to improve the products and services we offer them.
The Board also reviewed in detail the proposed communications plan and the approach to engaging with key stakeholders
as well as our regulators, the media and politicians. Acknowledging that there was likely to be some potential adverse
reaction, particularly from those with a strong affinity to RBS and Royal Bank of Scotland, the Board noted that the
communications plan had been developed to help to mitigate this reaction and manage the interests and sensitivities for
colleagues, media, politicians, customers and investors.
Colleague communications and messaging were shared with the Board emphasising that the jobs of our colleagues and
the service provided to our customers in Scotland would not be impacted by the change of name. The Board also noted
that there would be no impact on customers’ day-to-day banking experience, as they would continue to interact with their
usual customer brand(s). The Board was strongly supportive of management demonstrating NatWest Group’s continuing
commitment to Scotland and the Royal Bank of Scotland brand.
From an investor perspective, the impact was also considered to be minimal. “NatWest Group” would be used as a brand
when talking about the Group as a whole and with investors, but there was no anticipated share price or ratings impact.
The Board also considered the costs of changing the name and introducing the new NatWest Group brand as well as the
impact on technology and systems, property, legal documents and agreements and company documentation.
After careful consideration and taking into account their duties under section 172(1), the Board approved the change of
name in principle and the communication and engagement plans were put into action. A number of directors, including
the Chairman and Group CEO, were directly involved in engaging with stakeholders following the announcement and
the Board was subsequently updated on the response to the announcement including media coverage and colleague
reaction. The project team then undertook an extensive programme of work to prepare for the legal change of name
which was formally approved by the Board in July 2020 and subsequently implemented.
51
Our stakeholders
noted the actions taken to support suppliers’ cashflow
during 2020 (which consisted of moving all UK and Ireland
supplier payments to immediate release).
The Group Chief Administrative Officer provided
regular updates to the Board, including on key external
partnerships and supply chain resilience.
The Board considered and approved NatWest Group’s 2019
Modern Slavery Act Statement, which sets out the steps
that we are taking to tackle modern slavery and human
trafficking within our business, supply chain and sphere of
influence.
Our Human Rights Statement was also reviewed by the
Group Sustainable Banking Committee and approved by
the Board during 2020.
The Group Sustainable Banking Committee supported
the Board by discussing our new Supplier Charter and
approach to suppliers in relation to our Modern Slavery and
Human Rights obligations.
For further details on our Modern Slavery Act Statement
and Human Rights Statement, refer to page 26.
Community and environment
Directors enhanced their knowledge and understanding
of climate issues through a dedicated training session led
by management which included a presentation by Lord
Stern (NatWest Group's independent climate change
adviser) on external developments as well as updates on
climate change risks and opportunities. In addition, the
Board received a foundational online learning module on
the impact of climate change on financial services and
directors have been offered further optional training from
the Cambridge Institute for Sustainability Leadership.
As set out in the Group Sustainable Banking Committee
report on pages 116 and 117, the Committee has spent
time focussed on climate and NatWest Group's climate
ambition. As part of these discussions, the Committee also
received external insights from the Green Finance Institute
which provided an overview of the relevant science, climate
modelling and the case to de-carbonise.
Management reporting on climate, strategy, ambition and
risk management activities features on both Board and
Board Committee agendas to support targeted monitoring
and oversight. Further information on Board oversight of
climate-related risks and opportunities can be found on
pages 75 and 76.
The Board were regularly updated on NatWest Group’s
wider community engagement activities throughout the
year, with particular emphasis on the COVID-19 support
provided to our local communities.
Supporting our Black, Asian
and Minority Ethnic Commitments
In June 2020, in response to the Black Lives Matter movement,
the Group CEO asked the global co-chairs of NatWest Group’s
Multicultural Network to set up a taskforce to listen, analyse and
deliver a set of commitments to address the key barriers facing
Black, Asian and Minority Ethnic colleagues, customers and
communities (the “Taskforce”).
The launch of the Taskforce was reported to the Board, which
was keen to be kept informed of the Taskforce’s progress. The
Board received regular updates from the Group CEO covering
various aspects of the Taskforce’s work including the all-
colleague listening survey, colleague communications and
executive management’s engagement with the Taskforce as it
worked to finalise its recommendations. The Group CEO also
facilitated a discussion at the June 2020 meeting of the CAP on NatWest Group’s response to Black Lives Matter and the
work of the Taskforce, the outputs of which were reported back to the Board in July 2020.
The Taskforce co-leads were invited to attend a Board meeting in September 2020 to present directly to the Board on
the work of the Taskforce. They explained to the Board how the 10 Commitments for engaging with Black, Asian and
Minority Ethnic colleagues, customers and communities had been developed; how the outputs of the work would be
communicated; and the learnings from the work and that there was clear alignment between the work of the Taskforce
and NatWest Group’s purpose in terms of championing potential. Following engagement by the Taskforce with the Group
CEO and the Group Executive Committee, a new target of 3% of Black colleagues in senior UK roles by 2025 had been
agreed in response to there being a higher under-representation of Black colleagues in senior UK roles. This new target
would be in addition to our existing target to have at least 14% Black, Asian and Minority Ethnic leaders in senior UK roles
by 2025. The Taskforce co-leads also responded to questions from the Board on topics such as colleague experiences and
support from non- Black, Asian and Minority Ethnic colleagues.
The Board wholeheartedly endorsed the work of the Taskforce and confirmed its support for the 10 Commitments
including the introduction of a new target to have 3% of Black colleagues in senior UK roles by 2025. A subsequent update
to the Board was provided on the publication of the Taskforce’s report “Banking on Racial Equality; A Roadmap for Positive
Change” including the key insights from the report.
Refer to page 27 for further information on the Taskforce’s report.
52
Our
customers.
We are a relationship bank for a digital world.
Our customers come to us to support their day-
to-day banking needs and to help them plan for
bigger financial moments.
Our stakeholders
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
At NatWest Group, championing the potential of the people, families and
businesses we support is at the heart of everything we do. Through our
branch network and digital channels, we support the financial health and
capability of 19 million customers in every nation and region of the UK and
Ireland. And as a champion of UK business, we support 1 in 4 UK businesses.
From start-ups to multi-nationals, we have the knowledge, skills and
capabilities to support business customers at every stage of their journey.
Listening to our customers
We respond to the needs of our customers by acting on the feedback we
receive from them. We have in place a framework of customer feedback
surveys that measure satisfaction with the services and products we offer
across our franchises. We also look beyond our existing offering by engaging
in continuous research to identify new opportunities for us to address the
evolving needs of our customers. Insights from these surveys and research
are reported at the most senior levels of the bank and play a crucial role in
shaping the development of our strategy, services and products.
Feedback from our customers played an invaluable role in shaping our
response to COVID-19 in 2020:
• We introduced a Companion Card and set up dedicated telephony
lines for over-70s and NHS workers.
• We also introduced Financial Health Checks targeted at helping
customers through the coronavirus crisis.
Active listening and research is helping us to bring forward the right
propositions to support our customers at every stage of their lives. For
example, because we know that more of our customers than ever before
are renting, in 2020 we developed the Housemate app to help people in
rented accommodation manage shared bills, build their credit score and
build tenancy trust.
Simplifying the customer experience
We know that we can do even more to deepen the relationships we have
with our customers. This starts with us being as simple as possible for our
customers to deal with. Under the leadership of Jen Tippin, who joined
NatWest Group in 2020 as Chief Transformation Officer, we are putting
the simplification of customer journeys at the heart of our transformation
agenda.
Through data-led decision making, we are prioritising the journeys that
will have the greatest impact on customer experience across the bank.
As part of this work, we have put in place a robust measurement system to
allow us to track progress against key goals; this includes improvements in
customers’ feedback. Having listened to how customers feel about our core
journeys, we have been working to:
• Migrate our account onboarding system to one that allows a much faster
time between application and the customer being able to use their account.
• Digitise where possible the loan application journey for our Commercial
Banking customers, in order to give quicker end-to-end times on application.
53
Our brands are our main
connection with customers.
Each brand takes a clear and
differentiated position to help us
strengthen our relationship with
our customers. For this reason, we
measure customer advocacy by
brand. The tables on the following
pages show NPS and Trust scores
for our key brands.
Our stakeholders
Supporting
our customers
We are committed to finding innovative solutions that
keep our customers safe and able to pay for the things
they need, when they need them.
In 2020, we launched 'Banking My Way', a free service that allows customers who need
additional support or adjustments to request bespoke assistance to make banking easier.
We share the information on our internal systems, so our customers don’t need to repeat
requirements every time they interact with us. Since ‘Banking My Way’ was launched we
have received instructions from over 40,000 customers.
We also introduced the Companion Card, enabling customers in vulnerable situations
and those in extended isolation to give trusted volunteers a way to pay for their essential
goods. The card can by topped up by up to £100 every five days and given to a trusted
person or carer to enable them to make purchases on behalf of the individual.
We were the first UK bank to offer customers in vulnerable situations and those in
extended isolation a fee-free cash delivery service to their door, with £5.0 million
delivered to customers across the UK in 2020. Additionally, customers can request a
‘Get Cash’ code that enables a trusted third-party to make ATM withdrawals up to £100
on someone’s behalf from any NatWest, Royal Bank of Scotland or Ulster Bank ATM.
These innovations have been introduced in response to the coronavirus crisis to help our
customers and enhance their ability to pay for essentials whilst protecting themselves.
5454
Customer Trust and Advocacy
Customer Trust
Our stakeholders
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
We use independent experts to measure our customers’ trust in the bank. Each quarter we ask customers to what extent they
trust or distrust their bank to do the right thing. The score is a net measure of those customers that trust their bank (a lot or
somewhat) minus those that distrust their bank (a lot or somewhat).
Over the course of 2020, the net trust score improved for NatWest but we narrowly missed our target by 1 point. For the Royal
Bank of Scotland, the net trust score also improved, but missed its target by 17 points.(1)
Q4 2020
Q4 2019
69
44
62
39
Source:
Yonder. Latest quarter’s data. Measured as a net % of those that trust NatWest/Royal Bank
of Scotland to do the right thing, less those that do not. Latest base sizes: 547 for NatWest
(England & Wales) and 202 for Royal Bank of Scotland (Scotland).
Note:
(1) Targets run Q3-Q3. NatWest Q3’20 = 67, against target of 68. Royal Bank Q3’20 = 40
against target of 57.
Customer Advocacy Scores
We also track customer advocacy for our key brands using the net promoter score (NPS), a commonly used metric in banking
and other industries across the world. This is measured through customer surveys in which customers are asked how likely
they would be to recommend their bank to a friend or colleague, on a scale of 0-10, with a score of 10 being ‘extremely likely’
and 0 being ‘extremely unlikely’. The NPS is calculated by deducting the percentage of ‘detractors’ (0 to 6 on the scale) from
the percentage of ‘promoters’ (9 and 10 on the scale), responses 7 to 8 on the scale are considered ‘passive’.
Overall NPS
Our improved NPS scores in Retail Banking reflect the commitment we have shown to our customers during the COVID-19
pandemic and the positive feedback we have received from customers, especially those supported from our frontline
during this difficult period. Our Business Banking customers have told us they have felt well supported during 2020 and
have appreciated our regular communication, the availability of financial support and, importantly, keeping our day-to-day
operations going. In Commercial Banking, both NatWest and Royal Bank of Scotland are the highest rated banks by NPS
score in their respective markets.
Retail Banking
Business Banking
Commercial Banking
Q4 2020
Q4 2019
Q4 2020
Q4 2019
Q4 2020
Q4 2019
7
-9
21
-12
4
-16
10
-18
-7
-25
24
27
23
9
-2
-13
Sources:
Retail Banking: Strategic NPS 12 month rolling data. Question: “How likely are you to recommend
[main bank] to a relative, friend or colleague in the next 12 months?”. Latest base sizes: NatWest: 9,633;
Royal Bank: 2,263. Coyne Research 12 month rolling data. Question: “Please indicate to what extent you
would be likely to recommend (brand) to you friends or family using a scale of 0 to 10 where 0 is not at all
likely and 10 is extremely likely”. Latest base sizes: 456 Northern Ireland; 998 Republic of Ireland.
Business Banking: Savanta MarketVue Business Banking, YE Q4 2020. Based on interviews with
businesses with an annual turnover up to £2 million. Latest base sizes: 1,072 for NatWest (England &
Wales), 447 for Royal Bank of Scotland (Scotland). Question: “How likely would you be to recommend
(bank)”. Base: Claimed main bank. Data weighted by region and turnover to be representative of
businesses in Great Britain.
Commercial Banking: Savanta MarketVue Business Banking, YE Q4 2020. Based on interviews with
businesses with an annual turnover over £2 million. Latest base sizes: 554 for NatWest (England &
Wales), 92 for Royal Bank of Scotland (Scotland). Question: “How likely would you be to recommend
(bank)”. Base: Claimed main bank. Data weighted by region and turnover to be representative of
businesses in Great Britain.
5555
Our stakeholders
Customer Journey and Transformation NPS
As we accelerate our focus on delivering digital services for our customers, it is essential that we
bring everyone with us on the journey. For example, maintaining Mobile NPS through a period of
unprecedented adoption of our digital channels shows that we have successfully managed to keep
new adopters comfortable with the channel by prioritising ease of use in our mobile app.
We continue to transform our key customer journeys across both Retail, Business and Commercial
banking so that customers experience the best of digital mixed with the human touch when they need
it. Feedback from customers shows that our frontline have delivered extremely well through COVID-19.
The strength of our service proposition alongside a fully end-to-end digitised lending journey for
businesses means that we have seen our Commercial Banking day-to-day servicing scores improve
steadily throughout the year.
Retail Banking
Account Opening
(current account
and savings) NPS
Dec 2020
Dec 2019
16
17
Mobile
NPS
Dec 2020
Dec 2019
44
44
Source:
Strategic NPS. Question: “For NatWest's Current Account / Savings Account, how
likely are you to recommend the experience of applying for & setting up the account?”.
Latest base size: 1,014.
Source:
Strategic NPS. Question: “Thinking about your recent experiences with NatWest’s
Mobile App, how likely are you to recommend their Mobile App to a relative, friend or
colleague in the next 12 months?”. Latest base size: 4,415.
Online Banking
NPS
Dec 2020
Dec 2019
22
21
Video Banking
NPS
Dec 2020
Dec 2019
71
N/A
Source:
Strategic NPS. Question: “Thinking about your recent experiences with NatWest’s
Online Banking, how likely are you to recommend their Online Banking to a relative,
friend or colleague in the next 12 months?”. Latest base size: 5,601.
Source:
Operational NPS. Question: “Thinking about your recent experiences with NatWest’s
video banking service, how likely are you to recommend the service to a friend, family
member or colleague?”. Latest base size: 470. Note, this is a new metric so data not
available for Dec 2019.
Business and Commercial Banking
Relationship Manager
NPS
Dec 2020
Dec 2019
35
20
Day-to-day Servicing
NPS
Dec 2020
Dec 2019
34
27
Source:
Operational NPS. Question: “Thinking about your recent experiences with
[relationship manager name], how likely are you to recommend your relationship
manager to a friend, family member or business associate?”. Latest base size: 573.
Source:
Operational NPS. Question: “Thinking about your recent experiences with NatWest’s
[channel or service], how likely are you to recommend NatWest to a friend, family
member or business associate?”. Latest base size: 6,718.
56
Our stakeholders
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Our
colleagues.
Engaging our colleagues is critical
to delivering our purpose. By
championing the potential of our
colleagues we are better placed
to help people, families and
businesses to thrive.
Employee Led Networks
Our eight Group-wide Employee Led Networks (ELNs), with over 23,000
members and allies globally, support our commitment to creating a healthy,
diverse, inclusive workplace for all colleagues. Sponsored overall by our CEO
Alison Rose, each ELN has an individual Executive sponsor who provides
direction, guidance, challenge and support. The ELN Chairs meet with
our CEO on a quarterly basis and are invited to attend the Bank Executive
Committee, on a rotational basis, to profile their work and provide oversight
on their key initiatives. The eight ELNs are the Gender Network, the
Multicultural Network, Rainbow – our LGBT+ Network, Enable – our Disability
Network, the Families & Carers Network, the Armed Forces Network, the
Aspire Network and the Sustainable Futures Network.
In addition to supporting colleagues, running events, informing and
educating, the combined expertise from the ELNs contributes to the
development of inclusive products and services for customers and to
the NatWest Group’s learning resources.
The eight ELNs are:
The Gender Network
The Multicultural Network
Rainbow – our LGBT+ Network
Enable – our Disability Network
The Families & Carers Network
The Armed Forces Network
The Aspire Network
The Sustainable Futures Network
57
Our stakeholders
Building a Healthy Culture
One of our core priorities is building a healthy culture. We
have clear goals which reinforce Our Values and form part
of our leadership team's objectives. We gather feedback
from our colleagues through our listening strategy, which
includes our colleague opinion surveys, a Colleague
Advisory Panel that connects colleagues directly with
our Board and 'Workplace', our social media platform. We
also track metrics and key performance indicators, and
feedback from regulators and industry bodies, including
the Banking Standards Board's (BSB) annual assessment
of culture in UK banking. After three years of strong and
broadly based increases in scores at NatWest Group, the
pace of improvement eased back in 2020 across most
characteristics of the BSB Assessment Framework to leave
scores stable to slightly higher. Having ongoing discussion
and engagement with our employee representatives such
as trade unions and work councils is vital and we regularly
discuss developments and updates on the progress of our
strategic direction.
Just under 50,000 (78%) of our colleagues completed our
most recent opinion survey. The results showed a further
improvement in colleague sentiment and NatWest Group
is now at or above the global financial services norms
(GFSN) and global high performing norms (GHPN) across
all comparable survey categories. This is our strongest
position to date and reflects our purpose and values coming
to life in our response to the pandemic. We deepened our
dialogue with colleagues in 2020, running 'COVID-19' pulse
surveys in May and July as well as increasing our dialogue
with colleagues relating to equality and inclusion through
our 'Supporting Black, Asian and Minority Ethnic' survey
in June.
Speak-Up
Colleagues can report concerns relating to wrong-doing
or misconduct through Speak Up, our whistleblowing
service. The service facilitates confidential and anonymous
reporting, as well as monitoring of potential whistleblower
detriment. When colleagues were asked if they feel safe to
speak up 88% responded favourably, reflecting continued
improvement in results for this question. In 2020, 441 cases
were raised compared to 458 in 2019.
Performance and Reward
Our approach to performance management provides
clarity for our colleagues about how their contribution links
to our purpose and all our employees have goals set across
a balanced scorecard of measures. We continue to ensure
employees are paid fairly for the work they do and are
supported by simple and transparent pay structures in line
with industry best practices. We keep our HR policies and
processes under review to ensure we do so.
This clarity and certainty on how we pay is also helping to
improve our colleague’s financial wellbeing, which is a core
priority in our wellbeing plans. In the UK, our rates of pay
continue to exceed the Living Wage foundation benchmarks
and we ensure employees performing the same roles are
paid fairly. We ensure colleagues have an awareness of the
financial and economic factors affecting our performance
through quarterly 'Results Explained' communications
and Workplace Live events with our Group Chief Executive
Officer and Group Chief Financial Officer. More information
on our remuneration policies and employee share plans
can be found in the 2020 Directors’ remuneration report.
Developing Skills and Capabilities
Becoming a purpose-led learning organisation is a
strategic priority for us. To prepare colleagues for a
sustainable future, we are committed to developing
knowledge, skills and behaviours in a number of key critical
capability areas that support our ambition and purpose. By
encouraging a culture of continuous learning, knowledge
sharing and reflective practice, we are ensuring that
colleagues stay relevant and employable – and that we can
adapt to the changing needs of our customers, communities
and context.
Our Leading on Purpose initiative began to immerse senior
leaders and influencers in the aspects of personal and
organisational change required to realise our Purpose-led
strategy and culture. This programme will continue over
multiple years, deepening awareness and purpose-led
maturity.
The NatWest Group Learning Academy provides access
to a wide range of core, common and technical learning
content to suit a range of learning styles and support
our colleagues develop for their jobs today, and careers
tomorrow.
We are focused on helping our colleagues develop the
right skills, mindsets and behaviours for the future and in
2019 we were the first UK bank to launch a Data Academy,
to nurture and grow data expertise, innovation and
collaboration. In 2020, it was recognised externally as
Best Development Programme at the Data IQ awards.
With over 7,220 individuals enrolled and 188 colleagues
having completed and graduated from their c.16 -week
programmes.
Professional standards are important to us and we
offer a wide range of learning to support professional
development. We work closely with a wide range of
professional bodies, government agencies and our peers
to maintain and grow professional standards across
the industry. We became the first bank to be awarded
Corporate Chartered status by the Chartered Banker
Institute in recognition of our continuing investment
in professional development and our commitment to
professional values and advocacy. Professional Career
Development Programmes (PCDP) are funded by the
apprenticeship levy and give our colleagues a great
opportunity to learn practical skills that they can use in
their current job and gain a professional qualification at
the same time. Over 680 colleagues have completed or
are currently undertaking a PCDP programme.
To keep NatWest Group safe and secure, everyone who
works for us must complete mandatory learning on
different parts of our policies – including anti-bribery
and corruption, health and safety, and inclusion. Some
colleagues also complete additional mandatory learning
that’s related to either where they work or the job they do.
In early August 2020, we launched the NatWest Group
Mobility Hub. The Hub is a key tool to support with
redeploying colleagues and reskilling them for the future
of work. The Hub offers support to build different skills,
develop career plans and help colleagues move around
internally or into opportunities outside the organisation.
Our female, ethnicity and disability development initiatives
focus on supporting our colleagues to reach their full
58
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Our stakeholders
potential and manage their careers effectively. These initiatives support
our commitment to building a more inclusive bank. In June 2020, we
launched our first ever bankwide Junior Management Team designed to
provide disruptive challenge and reverse mentoring to our Group Executive
Committee. We identified a diverse group of twelve representatives through
a robust assessment process and they attended their first Executive
Committee session in early September 2020.
Our 2020 NextGen talent development proposition has 229 members
and during an unprecedented year we continued to provide a blend of
development opportunities for high potential colleagues at managerial
level, helping them become our future leaders. The learning opportunities
available through this programme align to our five critical people capabilities
that help colleagues build the right knowledge, skills and behaviours.
To support our Purpose-led strategy we are working with Leadership
Through Sport & Business to recruit young people who come from under-
represented backgrounds for apprenticeships, recognising that many can
thrive in major firms if they have access to skills building training prior to the
recruitment process starting.
In October 2020 we welcomed 60 individuals into our Social Mobility
Apprenticeship Programme, as part of our overall goal to deliver c.400
additional apprentice hires over three years. Candidates applied for
apprentice positions in digital, data, technology or customer service in
London, Manchester and Edinburgh.
Wellbeing
As a strong component of making NatWest Group a purpose-led organisation,
an established wellbeing strategy is key. Through our People Pledges we
committed to support the wellbeing of our colleagues, customers and
communities all of which was reinforced through our Group-wide People
Strategy. Our work in wellbeing has been recognised externally, winning the
Health and Wellbeing category at the HR Excellence Awards 2020.
Understanding and caring for the changing and differing needs of our
colleagues remained our priority during COVID-19. We flexed and evolved
our original wellbeing plan and quickly built wellbeing and learning into
our daily routines. Our "Live Well Being You" COVID-19 Wellbeing Plan
placed colleague wellbeing firmly at the centre of our incident response.
We developed a wellbeing plan which was reviewed and updated each
quarter, and launched a Wellbeing COVID-19 hub, signposting colleagues to
public health information, emotional wellbeing support, new physical health
interventions, financial wellbeing guidance and support, community and
volunteering opportunities, leadership support and guidance on managing
bereavement and domestic abuse. Through our business facing teams we
also offered support to our SME and personal customers.
Some of the practical tools we provided include; 24/7 access to a virtual GP,
launching a range of new emotional wellbeing support programmes and a
new mandatory online module to help colleagues understand and improve
their resilience. Several campaigns during the year also allowed us to focus
on physical health (menopause, reproductive health and male mental health)
and a focus on wellbeing throughout the seasons as we approached winter
for our colleagues in the northern hemisphere.
We continued to monitor the wellbeing of our colleagues throughout and
our pulse surveys helped us understand the specific points of wellbeing
impacting our colleagues. 90% of colleagues felt their line manager cared
about their physical and mental health, and 45% of colleagues felt COVID-19
impacted their mental health. Our internal wellbeing index shows that we
are 3% above other high performing companies and 9% above GFSN.
During the year, we launched our Wellbeing Champion network which
rapidly grew to over 1,000 colleagues who committed to providing wellbeing
support to their teams, supported by enhanced learning and a deeper
understanding of our wellbeing strategy. Unable to host our annual Mental
Health Awareness Conference as a physical event, we created a virtual
conference showcasing a number of expert speakers and activities for
our colleagues.
10,000
We launched a new mandatory
online mental health learning
module for over 10,000 managers
to help them support colleague
wellbeing.
Investing in Colleagues
Launched our People Pledge –
a set of commitments made in
response to what colleagues told
us meant most to them. The pledge
was split into five promises: Help
you develop your skills, Support
your wellbeing, Help customers
thrive, Invest in our teams; Help
you make a difference. Despite the
challenges of 2020, we delivered
against each of the promises, in
many cases accelerating planned
work, to provide a purpose-led
response for colleagues.
Note: References to “colleagues” in this Strategic Report, mean all members of our workforce (for example, contractors, agency workers).
59
Our stakeholders
Diversity and Inclusion
We are proud to be building a sustainably progressive,
inclusive and diverse bank where we champion potential,
helping people, families and businesses to thrive.
Our inclusion guidelines apply to all our colleagues globally to make sure everyone feels included and valued,
regardless of their background. As at 31 December 2020 our permanent headcount was 59,822. 51% were male
and 49% female. Our Diversity and Inclusion plans apply globally and are formed around five key priorities:
Gender Balanced
• Our Boardroom Inclusion Policy aims to promote
diversity and inclusion in the composition of the Board
and reflects the most recent industry targets. The Policy
also acknowledges NatWest Group's ambition to aim for
a full gender balance across the organisation by 2030.
In our Executive Management team we have females
in both our Chief Executive Officer and Chief Financial
Officer roles, as well as our Chief Marketing Officer, Chief
Transformation Officer, Chief Governance Officer and
Company Secretary, and Chief Human Resources Officer
all being female.
•
In 2015 we set targets for our CEO and the Executive
Committee to have at least 30% women in the global top
three layers of each of their areas by the end of 2020 and
to have full gender balance by 2030. At the end of 2020,
we have, on aggregate, 39% women in our top three
leadership layers, an increase of 10% since targets were
introduced and our pipeline (c.4000 of our most senior
roles) has 43%. 14 of our 15 business areas are at or
exceeding 30 % women in their top three layers.
• The mean gender pay gap for NatWest Bank is 30.2%
(median: 34.3%) and the mean gender bonus gap is 26.9%
(median: 16.7%). The statutory bonus gap calculated in
line with regulation is the number including recognition
vouchers (mean 50.2%; median 92.8%). This means that
even colleagues who received a small recognition award
– for example £10 – are included in the calculations. Most
colleagues in our more junior jobs only receive fixed pay
– a change made to provide more certainty over
earnings; and this means that many colleagues included
in the statutory bonus gap calculations only received a
recognition award. We currently have a higher
proportion of women in these roles. We therefore believe
the figures excluding recognition vouchers 26.9%
(median: 16.7%) are the most accurate reflection of our
gender bonus gap today.
• Our targets are supported by our positive action
approach, which is benchmarked externally, helping
to ensure that our people policies and processes are
inclusive and accessible – from how we attract and
recruit, to how we reward and engage colleagues. We
are confident this approach is the right one and through
time, it will help us achieve a better balance of diversity
throughout the organisation.
• We have been rated in the top organisations in
Bloomberg's Global Gender Equality Index, retained
our position in The Times Top 50 Employers for Women
and continued to report our progress to HMT Women in
Finance Charter and the Hampton-Alexander Review.
• We demonstrated our social purpose, including
supporting the Financial Alliance for Women to create
a How-To Guide on Becoming the Employer of Choice
for Women and became a signatory to the British
Deputy High Commission’s ‘UK in India’ Network Gender
Equality Charter.
Disability Smart
• Our goal is to become a Disability Smart bank by
ensuring accessibility features in all our products,
services, behaviours and key processes.
• For our colleagues with disabilities we support them with
workplace adjustments so that they can succeed. If a
colleague becomes disabled we will, wherever possible,
make adjustments to support them in their existing role
or re-deploy them to a more suitable alternative role.
• We responded to the restrictions of the pandemic and
provided development sessions online to continue to
support the development and career progression of
colleagues with disabilities by addressing common
barriers they can face.
• We hold a gold rating in the Business Disability Forum
(BDF) benchmark. We also hosted our second Disability
Conference in partnership with the BDF.
• We continue to demonstrate our social purpose, including
being founding signatories to the Valuable 500 Pledge,
the global movement putting disability on the business
leadership agenda and we are ranked as Leader level in
the UK Government’s Disability Confident Scheme.
Ethnically Diverse
•
In 2018 we introduced a formal UK target to improve
the representation of Black, Asian and Minority Ethnic
colleagues in our top four UK leadership layers to at least
14% (in line with the working age UK Black, Asian and
Minority Ethnic population identified by the Office for
National Statistics) by 2025. In addition to this, as Black
colleagues are under-represented in senior roles across
the UK, in 2020 we introduced a new target to have 3%
Black colleagues in our UK senior roles by 2025.
• As at the 31 December 2020 we have on aggregate
10% Black, Asian and Minority Ethnic colleagues in our
top four leadership layers in the UK, representing a 2%
increase since targets were introduced. We currently
have c.1% of colleagues who identify as Black in our UK
senior roles. Overall, we employ 16% Black, Asian and
Minority Ethnic colleagues across the UK. Our disclosure
rates remain high, with 83% of our colleagues in the UK
60
disclosing their ethnicity. As with gender, our targets
•
are supported by a positive action approach. For more
information on our approach refer to natwestgroup.com.
•
In line with our commitment to transparency under
the UK Government's Race at Work Charter and in
anticipation of a requirement to disclose our ethnicity pay
gap, we have voluntarily disclosed our ethnicity pay gap
for NatWest Group combined UK & Ireland. The mean
ethnicity pay gap for NatWest Group is 9.4% (median:
14.1%). The mean ethnicity bonus gap for NatWest Group
is 24.1% (median: 2.5%).
• We were confirmed as a Top Ten Outstanding Employer
in Investing in Ethnicity & Race Awards and continued
to report our progress to the UK Government's Race at
Work Charter.
•
In June 2020, we established a Taskforce led by the
Chairs of our Multi-Cultural Employee Led Network to
help better understand what more we can do to break
down barriers faced by many people, including those
from Black, Asian and Minority Ethnic backgrounds. This
culminated in the launch of our report, Banking on Racial
Equality; A Roadmap for Positive Change, accompanied
by a set of targets and commitments, which will set the
standard for racial equality in NatWest Group.
LGBT+ Innovative
• Our LGBT+ agenda continues to deliver a better
experience for our LGBT+ colleagues and customers,
reflected within our policies and ways of working, across
our locations globally. While reflecting local legislation
and jurisdictional requirements, we are clear that LGBT+
colleagues and customers are welcome at NatWest
Group and will be supported.
Our stakeholders
In 2020 we supported our People Pledge by establishing
a programme of Inclusion Champions. With over 1,100
members, the champions form a global network of
positive disrupters, who educate colleagues on Inclusion,
and will work together to drive change on topics like
ethnicity, LGBT+, gender balance, disability awareness
and inclusivity.
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
• During 2020 we introduced "Inclusion with Purpose"
our diversity and inclusion learning to support being a
purpose-led organisation. The learning outlines the role –
through intentional, positive and conscious efforts – that
each one of our colleagues can play in helping to build a
sustainably inclusive workplace.
• We continue to demonstrate our social purpose, including
being founding signatories to the EHRc’s Working
Forward, meeting the criteria for the London Mayor
Good Work Standard accreditation, and ranking top
5 overall as well as in the top 5 for ethnicity, sexuality,
socioeconomic status and parenthood in the McKenzie-
Delis Packer Review.
• For more information on our Inclusion work, including our
positive action approaches, refer to natwestgroup.com
2020 UK Ethnicity Profile (*)
#Black, Asian and
Minority Ethnic
#White
%Black, Asian and
Minority Ethnic
CEO-3 and above
43
609
CEO-4
CEO-5
Target Population
(CEO-4 and above)
255
2,108
778
4,765
298
2,716
7%
11%
14%
10%
• We have standardised our policies globally, placing
us ahead of industry norms in some countries where
we operate.
Note: We report to reflect our organisational (CEO) levels. This method more
accurately describes ethnicity at leadership/pipeline levels. As well as being more
reflective of our organisational structure, this enables comparison to be made
externally. This report only includes colleagues who have disclosed their ethnicity.
We report CEO to CEO-3 as a total to comply with GDPR restrictions.
•
In 2020, we had to reimagine the way we show support
for Pride. Many of our events moved online; this included
a panel discussion on 'Pride is still a protest', attending
digital prides around the country and running a social
media campaign across our digital channels. We also
lit up our offices in Pride colours and raised money for
LGBT+ charities.
• We were confirmed as a Stonewall Global Top Employer
in the 2020 Global Stonewall Index and we are a Founding
Partner of the 2020 LGBT Awards.
Inclusive Culture
• At NatWest Group, we are committed to ensuring that
all colleagues are given full and fair consideration
for employment and subsequent training, career
development and promotion based on merit.
• Colleague sentiment on inclusivity remains high at
90 points, 17 points above the GFSN and 13 points
above GHPN.
• We continue to support our strong Employee Led
Networks that have c.23,000 members.
2020 Global Gender Profile (*)
CEO
CEO-1
CEO-2
CEO-3
CEO-4
#Women
#Men
%Women
1
–
100%
4
12
48
82
294
452
1,405
1,947
25%
37%
39%
42%
39%
Target Population (CEO-4
and above)
346
546
Note: We report to reflect our organisational (CEO) levels. This method more
accurately describes our gender balance at leadership/pipeline levels. As well as
being more reflective of our organisational structure, this enables comparison to be
made externally.
Male
Female
Executive Employees
72 (73%)
27 (27%)
*Director of Subsidiaries
203 (77%)
62 (23%)
There were 364 senior
managers (in accordance with
the definition contained within
the relevant Companies Act
legislation), which comprises
our executive population and
individuals who are directors
of our subsidiaries.
(*) Within the scope of EY assurance. Refer to page 66.
61
Our stakeholders
Risk
Overview.
Effective risk management is vital to
the successful delivery of the Group’s
strategy and purpose.
Risk is an inherent part of doing business. In day-to-day
activities, all organisations must address a variety of risks.
These may arise from the external factors such as the
economic environment, competitor activity and changes in
regulation or from internal factors such as transformation
programmes and human error.
NatWest Group faces a range of financial and non-financial
risks from both external and internal factors. To address
these, it operates an enterprise-wide risk management
framework centred around the embedding of a strong
risk culture. The framework ensures tools are in place to
identify and manage both internal and external threats. It is
organised around the Group’s principal risks:
Principal financial risks
Principal non-financial risks
Credit Risk
Market Risk
Capital Adequacy Risk
Liquidity & Funding Risk
Pension Risk
Earnings Volatility Risk
Conduct Risk
Financial Crime Risk
Operational Risk
Regulatory Compliance Risk
Model Risk
Climate Risk
Reputational Risk
Management of these risks – detailed in the Risk and Capital
Management section of the 2020 Annual Report and
Accounts on pages 157 to 164 – is overseen by the Group’s
independent Risk function. While all colleagues share
ownership of risk management, the three lines of defence
model is used to define responsibilities and accountabilities.
This ensures that risks are properly identified, measured,
monitored, controlled and reported.
Risk appetite defines the levels of risk the Group is willing
to take as part of its business activities. Risk appetite is set
in line with the Group’s overall strategy and approved by
the Board. This ensures that effective risk management is
integrated into the day-to-day course of business activities
including strategic planning.
Areas of focus in 2020
It was a priority to ensure the Group was able to safely
support people, families and businesses through the
unprecedented events of the coronavirus pandemic. Risk
management activities were focused on the material
threats arising from the pandemic itself, as well as those
that strongly correlated with, or were intensified by, it.
Several of the Group’s principal risks were directly affected
by the pandemic – especially the credit risks, which
deteriorated during the year, and operational risks which
were heightened as the Group adapted to new ways of
working due to lockdown protocols. Operational resilience,
especially in terms of maintaining the continuity of key
services, was a focus.
There was also volatility in the financial markets and, at
times, varying degrees of illiquidity as the effects of the
pandemic began to emerge. This highlighted the
62
importance of the Group’s prudent approach to market
risk management, which is described in further detail on
pages 229 to 239 of the 2020 Annual Report and Accounts.
Overall, the traded market risk profile remained broadly
unchanged in comparison with 2019, given ongoing de-
risking activities as part of the Group’s overall strategy.
The non-traded market risk profile, however, remains
heightened. Volatility across all asset classes during periods
of the crisis affected credit spreads and as a result the
liquidity portfolios held by Treasury.
Against this backdrop, the Group played a key role in
ensuring that customers affected by the pandemic were
able to access support through the government-backed
loan schemes. These included the CBILS, BBLS, CLBILS
and CCFF initiatives. The Group also facilitated payment
holidays for affected customers, within the guidelines set
by its regulators. In each case, risk management processes
and decisioning were critical in ensuring this support was
provided in a safe, sound and helpful way. While the Group’s
risk profile relative to appetite continued to be reported
regularly to the executive and the Board, additional regular
reporting on the impacts of the pandemic was introduced.
This ensured a clear and transparent view of the Group’s
risk profile as it evolved through the crisis.
Although impairment provisions were significant, driven
by IFRS 9 forward-looking expected credit losses on
performing assets in Stage 1 and Stage 2, actual Stage 3
defaults were relatively modest (the impairment charge
for Stage 3 defaulted assets in 2020 was similar to 2019 at
approximately £600 million). The Group anticipates further
defaults across the portfolios once the various government
support schemes for households and businesses are
withdrawn, with the impact mitigated to some extent by
the Stage 1 and Stage 2 provisions raised in 2020. Further
pressure on UK GDP and an increase in unemployment
could increase this risk.
Scenario planning
In order to help lenders focus on meeting the needs of
UK households and businesses during the pandemic,
the Bank of England cancelled its 2020 stress test. The
European Banking Authority also decided to postpone its
stress test. However, the Group continued with its own
scenario planning, particularly with scenarios designed to
incorporate the likely economic impacts of the pandemic.
Three scenarios in particular were used to illustrate the
consequences of modest, medium and extreme impacts.
The second of these scenarios aligned relatively closely
with the Bank of England’s published stress scenario. In
all three cases, the Group was able to withstand the most
severe impacts without breaching regulatory capital
thresholds.
The conduct risk profile was a key focus as the Group
made sustained efforts to ensure that it was able to
support, at pace, customers, families and businesses
affected by the pandemic.
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Though the impact of the pandemic was a priority for
the Group’s risk management activity, the uncertainties
relating to the UK’s withdrawal from the European Union
also continued to be a focus. Outcomes remain difficult
to predict but oversight of planning for the economic,
regulatory and legislative impacts remained a critical part
of forward-looking risk management throughout the year.
While the longer-term effects on the operating environment
remain unpredictable, the potential second and third order
effects on the Group and its customers continue to be
an area of focus. This includes planning for the results of
periodic financial volatility and slower economic growth.
The ongoing low interest rate environment – including
the possibility of negative rates – continues to present
an industry-wide challenge. In combination with the
deteriorated economic outlook resulting from the
pandemic, sustained net interest margin compression
increases risk to the achievement of the Group’s financial
and strategic objectives. While some rebalancing of
business activity can mitigate short-term impacts, the
effect of prolonged low interest rates over the medium term
intensifies threats to the business model. This highlights the
importance of the Group’s strong capital position. Dynamic
risk management, including consideration of funding
structure and off-balance-sheet activities, remains crucial
in ensuring that the business objectives remain achievable.
Cyber security remained a consistent focus through the
year – particularly given the importance of technological
solutions to addressing customer needs during the
pandemic. The Group continues to operate a multi-layered
defence approach and continues to invest in control
enhancements to ensure it minimises cyber-related risks.
The impact of the pandemic intensified the threat of
disruption to the Group’s business model, particularly
in accelerating trends in new technology and customer
behaviour. While the Group’s digital channels continue to
evolve, anticipating developments in this area and seeking
to mitigate related risks remain central to the Group’s risk
management practices.
Risk culture
As part of its multi-year programme to enhance risk
management capability at every level of the organisation,
the Group continued to work towards embedding a
generative risk culture across all three lines of defence. This
supports intelligent risk-taking, better customer outcomes,
stronger and more sustainable business as well as an
improved cost base. While risk culture continued to improve
in 2020, due to a number of factors – including the impact of
COVID-19 – one area of the Group did not attain the desired
“systematic” rating. As a result, the Group did not meet its
risk culture target. Work will continue in 2021.
Climate risk
During most of 2020, climate-related financial risk was
classified as a top risk. However, during Q4, in recognition
of its importance to core risk management, climate risk was
elevated to a principal risk. For further information, refer
to pages 242 and 243 of the Risk and Capital Management
section of the 2020 Annual Report and Accounts.
LIBOR transition
The Group is continuing its preparations for the transition
from LIBOR to other interest-rate benchmarks by the end
of 2021 and continues to work closely with regulators
and industry bodies to manage the impact. Oversight of
the Group-wide programme to prepare for the transition
remains a priority along with activities across all three lines
of defence to minimise risk and disruption to customers.
Risk management
Financial crime compliance and management
The Group has continued to enhance the policies,
processes and systems used to combat the continuously
evolving threat of financial crime. During 2020, a new
enterprise-wide Financial Crime Hub was established in
the first line to detect and prevent financial crime. The Hub
will facilitate a common, consistent approach to managing
financial crime. A multi-year transformation plan has also
been developed to ensure that - as changes in technology,
the economy and wider society take place - risks relating to
money laundering, terrorist financing, tax evasion, bribery
and corruption and financial sanctions are managed,
mitigated and controlled as effectively as possible.
To support this, enhancements will also be made to
management information. A new Financial Crime executive
steering committee has been set up to provide oversight of
the plan and its implementation.
Anti-bribery and corruption (ABC)
The Group is committed to ensuring it acts responsibly
and ethically, both when pursuing its own business
opportunities and when awarding business. Consequently,
it has embedded appropriate policies, mandatory
procedures and controls to ensure its employees, and
any other parties it does business with, understand
these obligations and abide by them whenever they act
for the Group. ABC training is mandatory for all staff on
an annual basis, with targeted training appropriate for
certain roles. The Group considers ABC risk in its business
processes including, but not limited to, corporate donations,
charitable sponsorships, political activities and commercial
sponsorships. Where appropriate, ABC contract clauses
are required in written agreements.
Risk-weighted assets (RWAs)
RWAs reduced by £8.9 billion at 31 December 2020, ending
the year at £170.3 billion (from £179.2 billion in 2019). This
reduction mainly reflected de-risking activity in NatWest
Markets together with a £1.9 billion decrease resulting from
the COVID-19 amendment to the Capital Requirements
Regulation and asset de-recognitions in Ulster Bank. The
total also included a £1.2 billion increase relating to the
acquisition of mortgages from Metro Bank plc.
Common Equity Tier 1 ratio
NatWest Group maintained a strong CET1 ratio of 18.5%
(2019 – 16.2%). This reflected both a reduction in RWAs
and the cancellation of the 2019 dividends and associated
pension contribution, offset by the inclusion of the 2020
foreseeable dividends and charges (40 basis points) together
with the introduction of the Article 36 CRR amendment on
the prudential treatment of software assets as well as the
adoption of IFRS 9 transitional arrangements on expected
credit losses, offsetting associated impairment charges.
Leverage ratios
The CRR leverage ratio increased to 5.2% (2019 – 5.1%). The
UK leverage ratio increased to 6.4% (2019 – 5.8%) due to a
£3.3 billion increase in Tier 1 capital.
Liquidity and funding
The liquidity portfolio increased by £63 billion to £262 billion.
Primary liquidity increased by £45 billion to £170 billion. The
increase in primary liquidity resulted mainly from increased
customer surplus in NatWest Holdings together with smaller
increases in other subsidiaries.
Litigation and conduct
Litigation and conduct costs of £113 million represent
£473 million of additional charges, mainly representing the
increased cost of review and execution of Other Customer
Redress as well as Litigation provisions, offset by various
releases as programmes conclude, including a £277 million
PPI release.
63
Risk Management
Top and
emerging risks.
A continuous process is used to identify and manage
the Group’s top and emerging risks. These are risks
that could have a significant negative impact on the
ability to operate or meet strategic objectives.
External
COVID-19
The COVID-19 pandemic has had a material adverse impact on NatWest Group and its customers. The Group responded quickly
to the elevated credit risks through active portfolio management including adjustment of risk appetite, proactive customer
contact strategies and scenario analysis. NatWest Group has participated in government initiatives to support customers during
the crisis including the Bounce-Back Loan Scheme which could increase conduct, reputational and fraud risks. High uncertainty
remains on the future evolution of the virus and the ultimate impact of the pandemic. While the strategy is being adapted in
response, the COVID-19 crisis could impede the Group’s ability to meet its targets and deliver its purpose-led strategy.
Economic
and Political
Risks
NatWest Group is exposed to the economic and political risks facing the UK including a weaker than expected economic recovery
from Covid-19, the prospect of negative interest rate policy and the UK’s exit from the EU. A range of complementary approaches
is used to mitigate these risks including scenario planning and stress testing. In 2020, the Group implemented plans to prepare for
the UK’s withdrawal from the European Union and continues to monitor geopolitical risks alongside domestic political risk
including developments in relation to a Scottish independence referendum. In the longer term, demographic change, high levels
of debt and inequality could all have financial impacts. As a result, these risks are closely monitored with strategic plans adapted
as appropriate.
Climate-
related Risks
NatWest Group expects to face significant risks in connection with climate change and the transition to a low carbon economy.
These risks are subject to rapidly increasing prudential and regulatory, political and societal focus, both in the UK and
internationally. Embedding climate risk into the Group’s risk framework and adapting NatWest Group’s operations and business
strategy to address the risks is in line with the Purpose-led strategy.
Cyber
Threats
NatWest Group experiences a constant threat from cyber-attacks both directly and to its supply chain, underlining the
importance of due diligence with the third parties on which the Group relies. The Group operates a multi-layered approach to its
defences and continues to invest significant resources in the development of cyber security controls and capability designed to
minimise the potential effect of cyber-attacks.
Competitive
Environment
NatWest Group operates in markets that are highly competitive raising the threat of a loss of market share and reduced revenue
and profitability. The risks mainly relate to changes in regulation, developments in financial technology (including digital
currency), new entrants to the market and shifts in customer behaviour. The Group closely monitors the competitive environment
and adapts strategy as appropriate to deliver innovative and compelling propositions for customers.
Regulatory,
Legal &
Conduct
Risks
Internal
Change Risk
NatWest Group operates in a highly regulated market. Regulations are constantly evolving and could adversely impact the Group
including capital, liquidity and funding requirements, enhanced data privacy requirements and the management of financial
crime. This includes the possibility of dividend suspensions or restrictions. The Group implements new regulatory requirements,
where applicable, and incorporates the implications of related changes in its strategic and financial plans. This includes the
transition from the use of interbank offer rates (IBORs), including LIBOR, to alternative risk-free rates. While a programme to
manage the transition is underway, uncertainties around the transition represent a number of risks including elevated legal and
conduct risks.
The implementation of NatWest Group’s Purpose-led strategy and the refocusing of NatWest Markets carry significant
execution, operational and people risks. NatWest Group continues to manage and implement change in line with its strategic
plans while assessing implementation risks and taking appropriate mitigating action. In addition, the Group continues to monitor
and strengthen its control environment through robust governance and controls frameworks.
Third Party
Suppliers
Operational risks arise from NatWest Group’s reliance on third party suppliers to provide a range of services including IT.
The Group is diligent in its screening of suppliers to mitigate these risks with strict contractual obligations governing supplier
relationships and activity.
IT System
Resilience
NatWest Group continues to invest in IT infrastructure to prevent customer service disruption, which could result in reputational
and regulatory damage. To mitigate these risks, a major investment programme has significantly improved the resilience of the
systems and further progress is expected.
Data
Management
NatWest Group relies on the effective use of accurate data to support operations and deliver its strategy. Failure to produce
high-quality data and/or the ineffective use of such data could result in a failure to deliver the Group’s strategy, including reducing
costs and meeting customer expectations. The Group is focused on implementing a long-term data strategy alongside control
and policy framework enhancements governing data usage.
64
Governance
at a glance.
The Board has eleven directors comprising the
Chairman, two executive directors and eight non-
executive directors, one of whom is the Senior
Independent Director. Biographies of the directors
can be found on pages 97 and 98.
Our Board
Board of directors
Chairman
Howard Davies
Executive directors
Alison Rose (Group CEO)
Katie Murray (Group CFO)
Non-executive directors*
Frank Dangeard
Patrick Flynn
Morten Friis
Robert Gillespie
Yasmin Jetha
Mike Rogers
Mark Seligman
(Senior Independent
Director)
Lena Wilson
Company Secretary
Jan Cargill
* Francesca Barnes, Graham
Beale and Ian Cormack, as
the 3 additional independent
non-executive directors of
NatWest Holdings Limited, also
attend NatWest Group plc Board
meetings. Further information
can be found in the Corporate
Governance Report on pages 99
to 105.
Our section 172(1) statement
is on pages 48 to 52 and
describes how stakeholders
have influenced Board
discussions and decision-
making throughout the year.
The Board is collectively responsible
for promoting the long-term success
of NatWest Group plc, driving both
shareholder value and contribution to wider
society. Its role is to provide leadership of
NatWest Group plc within a framework of
prudent and effective controls which enables
risk to be assessed and managed.
In 2020, the Board and committee evaluation
process was conducted by the Company
Secretary.
Our Board committees
In order to provide effective oversight
and leadership, the Board has established
a number of Board committees with
particular responsibilities. The work of
the Board committees is discussed in their
individual reports. The terms of reference
for each of these committees is available on
natwestgroup.com.
The full Governance report is on pages
99 to 105 of the 2020 Annual Report
and Accounts.
Group Audit Committee
Assists the Board in discharging its
responsibilities for monitoring the quality of
the financial disclosures of NatWest Group.
Reviews the accounting policies, financial
reporting and regulatory compliance
practices of NatWest Group and its systems
and standards of internal controls, as well as
monitoring the work of internal audit and the
external auditor.
Group Board Risk Committee
Provides oversight and advice to the Board
in relation to current and potential future
risk exposures of NatWest Group, future risk
strategy, risk appetite and tolerance. Also
responsible for promoting a risk awareness
culture within NatWest Group.
Group Sustainable Banking Committee
Supports the Board in overseeing, supporting
and challenging actions being taken by
management to run NatWest Group as a
sustainable business, capable of generating
long term value for its stakeholders.
65
Risk Management
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Group Performance and
Remuneration Committee
Responsible for approving remuneration
policy and reviewing the effectiveness
of its implementation. Also considers
senior executive remuneration and makes
recommendations to the Board on the
remuneration of executive directors.
Group Nominations and
Governance Committee
Assists the Board in the formal selection
and appointment of directors. Reviews
the structure, size and composition of the
Board, and membership and chairmanship
of Board committees. Also has responsibility
for monitoring NatWest Group's governance
arrangements in order to ensure best
corporate governance standards and
practices are upheld.
Technology and Innovation Committee
Assists the Board in overseeing , supporting
and challenging actions being taken by
management in relation to technology and
innovation.
Group Executive Committee
Supports the Group Chief Executive Officer
(Group CEO) in managing NatWest Group's
businesses. Considers strategic, financial,
capital, risk and operational issues affecting
NatWest Group.
UK Corporate Governance Code
Throughout the year ended December 2020,
NatWest Group plc has applied the principles
and complied with all of the provisions of
the UK Corporate Governance Code issued
by the Financial Reporting Council dated
July 2018 (the Code) except in relation to
provision 17 that the Group Nominations and
Governance Committee should ensure plans
are in place for orderly succession to both the
Board and senior management and oversee
the development of a diverse pipeline for
succession, and provision 33 that the Group
Performance and Remuneration Committee
should have delegated responsibility for setting
remuneration for the Chairman and executive
directors. The Board considers that these are
matters which should rightly be reserved for
the Board. Our full statement of compliance
with the Code can be found on page 151.
Governance and compliance
Non-financial
information Statement.
This Non-financial information Statement provides an overview of topics and related reporting
references across our external reporting as required by Sections 414CA and 414CB of the
Companies Act 2006. We integrate non-financial and Environmental, Social and Governance
(ESG) information across the Strategic Report and wider reporting suite, thereby promoting
cohesive reporting of non-financial and ESG matters.
Reporting Requirement
Page references in
this document (pages)
Relevant policy available at
natwestgroup.com
Business
model
• Building a purpose led bank and Our strategy
• How we create value
• Our business performance
Our stakeholders
• Stakeholder engagement
• Section 172(1) statement
• Our Customers
• Our Colleagues
Environment
• Climate-related disclosures
• Risk overview and Top and emerging risks
• Climate-related risks
• Risk factors
• 16 to 22
• 30 to 31
• 33 to 45
• 46 to 47
• 48 to 52
• 53 to 56
• 57 to 61
• 69 to 83
• 62 to 64
• 242 to 243
• 345 to 362
Environmental, social
and ethical policies
Our colleagues
• Culture, Learning, Wellbeing, Performance and Reward
• Diversity and Inclusion
• Speak Up – Whistleblowing service
• 57 to 59
• 60 to 61
• 58
Our Code
Governance
• Section 172 (1) statement
• Boardroom Inclusion Policy
• Corporate Governance
• Directors remuneration report
• Report of the directors
• 48 to 52
• 106
• 99 to 107
• 119 to 132
• 153 to 155
Boardroom inclusion policy
Social matters
• Our operating environment
• Supporting our customer, colleagues and communities
throughout the UK and Ireland through COVID-19
• Tax
• Suppliers
• Human Rights
Respect for
Human Rights
• 24 to 26
Supplier Charter
• 22
• 31 and 343 to 344
• 30 and 46 to 51
• 26 and 47
Statement on Human Rights
Anti-Bribery and
Corruption (ABC)
• Risk Management
• Mandatory learning for all colleagues
• 63
• 58
Statement on Anti-Bribery
and Corruption
Risk management
• Risk Overview
• Top and emerging risks
• Risk and capital management
• Risk factors
• 62 to 63
• 64
• 157 to 245
• 345 to 362
Environmental, social and
ethical policies
ESG reporting
frameworks and
guidance
We are actively monitoring developments inlcuding in relation to metrics. In 2020 our focus included the Sustainability
Accounting Standards Board (SASB) standards, the Global Reporting Initiative (GRI) standards, the Task Force on Climate-
related Financial Disclosures (TCFD) and the World Economic Forum (WEF) International Business Council (IBC) metrics.
Further information on non-financial and ESG matters can be found in the following places within our reporting suite
• Climate-related disclosure report
• natwestgroup.com
Assurance approach
The scope of work performed by NatWest Group’s independent auditor Ernst & Young LLP (EY) as part of their review of other information included in the
2020 Annual Report and Accounts is described in the Independent auditor’s report to the members of NatWest Group plc on pages 249 to 258. In addition,
NatWest Group plc appointed EY to provide limited independent assurance over selected ESG (including climate-related disclosures) content marked
with (*) as at and for the year ended 31 December 2020.The assurance engagement was planned and performed in accordance with the International
Standard for Assurance Engagements (ISAE) 3000 Revised, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information.
A limited assurance opinion was issued and is available on NatWestGroup.com. This opinion includes details of the scope, respective responsibilities,
work performed, limitations and conclusion.
66
Viability
statement.
In accordance with the UK Corporate Governance Code,
the Board is required to make a statement in the Annual
Report regarding the viability of the Group.
Governance and compliance
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Taking into account its current position, and the principal
risks it faces, this statement must explain the Board’s
assessment of the Group’s prospects over an appropriate
period of time. It must also set out the Board’s conclusion
on whether or not there is a reasonable expectation that
the Group will be able to continue in operation and meet its
liabilities as they fall due over that time horizon.
In assessing the Group’s future prospects, the Board
considers a period of three years to be appropriate.
Although strategic and business planning – as well as
internal stress tests – are based on a five-year timespan,
levels of uncertainty increase as the time horizon extends
and therefore the shorter period is considered more
suitable for this assessment. The Board will continue to
monitor and consider the appropriateness of this period.
In making its assessment, the Board has considered:
The Group’s long-term business and strategic plans;
The Group’s risk profile and risk management practices, including the processes by which risks are identified and mitigated;
The Group’s principal risks as well as emerging risks that could have a significant negative impact on the Group’s ability to
operate or meet its strategic objectives over the medium term, including an assessment of the likely impact of such risks
crystallising individually and in combination;
The results of internal stress tests, which include consideration of the Group’s principal and emerging risks
within the scenario design;
The Group’s current capital position and projections over the relevant time horizon;
The Group’s liquidity and funding profile, including projections over the relevant time horizon; and
The wider political, economic and regulatory environment within which the Group operates, including uncertainties
relating to the geopolitical outlook, the global pandemic and the UK’s exit from the European Union.
The Group’s business and strategic plans, which are
reviewed and evaluated on an annual basis at minimum,
provide long-term direction. This includes multi-year
forecasts assessing the Group’s expected financial position
throughout the planning period. Threats to the achievement
of those plans – including financial, operational, conduct
and financial crime risks – are identified and assessed
through the Group’s risk management framework. As part
of this, Board-approved risk appetite is a key consideration.
Performance against risk appetite for each of the principal
risks is reported to the Board on a regular basis together
with assessments of emerging risks that could have an
impact within the planning horizon. The Group’s principal
risks and uncertainties are set out on page 64 of this
report. Further detail can be found in the Risk and Capital
Management section of the 2020 Annual Report and
Accounts (pages 160 to 164).
A series of varying stress scenarios is used as part
of internal stress testing. These are designed to be
extreme but plausible and take account of potential risk
management actions and mitigation supported by the risk
management framework. Reverse stress testing is also used
to assess scenarios and circumstances that could make the
Group’s business model unviable. The results are reported
to the Board Risk Committee and the Board.
The Board also considered the impact of the COVID-19
pandemic in its assessment of the Group’s viability. This
included a range of potential implications intensifying in
severity across a number of internally-developed
macroeconomic scenarios. Among these was the
downside scenario used for expected credit loss modelling
in H1 (published in the Group’s Interim Results on 30 July
2020. As a result of COVID-19, the regulatory stress tests
normally carried out annually (for the Bank of England) and
biennially (for the European Banking Authority) were
suspended in 2020. However, the Group continuously
refined and reviewed its internal scenarios as the impact
of the pandemic evolved, including actual and potential
effects on economic fundamentals. These scenarios
were benchmarked against the Bank of England’s
illustrative scenario.
67
Governance and compliance
The Group’s planning and forecasting relative to COVID-19 incorporated several potential recovery scenarios and included:
The impact of travel restrictions, social distancing policies, self-isolation and sickness on GDP,
employment and consumer spending
The impacts on business investment in critical sectors
The effect on house prices, commercial real estate values and major project finance, as well as
The effect of government interventions such as the Job Retention Scheme and the Coronavirus
Business Interruption Loan Scheme.
Applying the macro-scenarios to the Group’s earnings,
capital, liquidity and funding positions did not result in a
breach of any regulatory thresholds.
has also remained strong, providing additional stability
as the Group faces into the uncertainties posed by the
unprecedented events in the external environment.
The Board’s assessment in this regard is that the Group
retains adequate levels of capital and liquidity – and is
appropriately operationally resilient – in order to continue
to be viable across the time horizon even in the most
extreme of these COVID-related scenarios.
The impact of the pandemic on both the economy and
the Group’s operations has been subject to continuous
monitoring with additional focus in the Group’s senior risk
committees and at Board level.
In considering the Group’s prospects over the period of
the viability assessment, the unprecedented effects of
COVID-19 and associated government responses were
reviewed against each of the principal risks. Using the
macroeconomic stress scenarios developed specifically
to assess the range of potential medium-term impacts,
iterative analyses were carried out to understand the
potential implications for each of the principal risks as
well as relevant emerging risks. Real-time insight from
the Group’s business segments was also used as part of
this exercise to ensure any areas of specific concern were
highlighted and addressed.
Planning has also taken into account a range of correlated
risks in order to ensure that the Group’s strategy and
forecasts remain appropriate for the evolving environment.
There has been considerable management focus on
the potential crystallisation of a severe but plausible
combination of significant risks.
In particular, across the time-frame of the assessment
and beyond, the consequences of the UK’s exit from
the European Union remain difficult to predict. In an
adverse scenario, any significant deterioration of the
UK economic environment – combined with the already
severe observable impacts of the pandemic – could amplify
existing risks and adversely affect the Group’s profitability.
The assessment also considered the effects of an
intensifying competitive environment particularly in the
context of the unprecedented disruption to underlying
economic cycles due to COVID-19. The Group maintains a
robust capital position and a strong balance sheet position.
The suspension of dividends following discussions with the
Bank of England and the Group’s principal shareholder,
together with extended transitional relief under IFRS 9 and
increased customer deposits, has resulted in the Group
holding capital in excess of its forecasted position. Liquidity
Throughout the year, consideration was given to the
likelihood of a catastrophic cyber-attack within the period
of the assessment. While the Group operates a multi-
layered system of defences, there is a possibility that a
successful cyber-attack could have a severe impact on
operations. However, the evolving threat is continually
monitored. The Group remains well-prepared and
continues to invest in this area to ensure that it remains
robustly protected.
The Group has been heavily focused on supporting people,
families and businesses through the pandemic – either by
providing repayment holidays, facilitating lending under the
government-backed schemes or even delivering cash to the
homes of vulnerable customers. As well as the higher credit
risk profile (discussed in the Risk and Capital Management
section of the 2020 Annual Report and Accounts) there was
also awareness of the potential increase in conduct risk due
to the need for different ways of working and for processes
to be developed at pace. The Group maintains a strong and
purposeful conduct culture, with a significant emphasis on
key tools – such as the Yes check – as well as mandatory
training. In Q3 2020 an internal survey based on responses
from nearly 50,000 colleagues showed positive and
improving results for culture, engagement and leadership.
In drawing its conclusions, the Board also considered
the following:
• The Group’s robust capital position (CET1 ratio of 18.5%,
goal: 13-14% by 2023). The current capital position
provides significant headroom above both our minimum
requirements and our MDA threshold requirements,
• The Group’s strong liquidity position (LCR of 165% at 31
December 2020, liquidity headroom of £72.1 billion),
• Drawing capacity of £77 billion under the Bank of
England’s Term Funding Scheme with additional
incentives for SMEs at 31 December 2020,
• Deposit growth during the year of £62.5 billion, and
• The Group’s ECL reserve build in 2020 of £2.5 billion
against future predicted default risk.
Based on the factors above, the current financial forecasts,
the management of the Group’s principal risks, including
mitigating actions, and the strength of its capital and
liquidity positions, the Board has a reasonable expectation
that the Group will be able to continue in operation and meet
its liabilities over the three-year period of the assessment.
68
Climate-related disclosures
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Climate-related
disclosures.
We recognise that climate change is a global issue
which has significant implications for our customers,
employees, suppliers, partners, investors and therefore
NatWest Group itself. In February 2020, we announced our
ambition to be a leading bank in the UK and RoI helping
to address the climate challenge; by making our own
operations Climate Positive by 2025, and by driving material
reductions in the climate impact of our financing activity.
We set ourselves the challenge to at least halve the climate impact
of our financing activity by 2030, and to do what was necessary to
achieve alignment with the 2015 Paris Agreement.
Our ambition is supported by the following key areas of activity:
Accelerating
the speed
of transition
Championing
climate solutions
Making our
own operations
Climate Positive
by 2025
Helping to
end the
most harmful
activity
Embedding
climate into
our culture
and decision
making
Progress during 2020 includes:
• Achieved Net Zero Carbon across our own operations.
• 90% of our global electricity is from renewable sources.
• £12 billion climate and sustainable funding and financing.
• Reduced oil and gas lending exposure by £0.8 billion.
• Launched new products and initiatives to support customers
transition to low carbon economy, including Green Mortgages.
NatWest Group publicly committed to support the Financial
Stability Board’s Taskforce on Climate-related Financial
Disclosure (TCFD) recommendations in 2017. We are making
progress on assessing climate-related risks and opportunities,
establishing governance and risk management processes, as
well as developing metrics and targets. This section includes a
summary of our climate-related disclosures. Refer to the 2020
Climate-related disclosures report for disclosures intended to
align with the TCFD recommendations.
69
Climate-related disclosures
Climate-related disclosures – Strategy
This section includes progress made during 2020 on each key
area within our climate ambition. Refer to the 2020 Climate-related
disclosures report for further details on our climate ambition.
1. Accelerating the speed of transition to a low carbon economy
We have identified several potential climate-related opportunities over the short, medium and long term
relating to the transition to a low carbon economy. The table below includes examples of the initiatives
we worked on in 2020, to test and explore the potential of these opportunities to support our customers.
Accelerating
the speed
of transition
Climate-related
opportunities
Retail Banking
Green Mortgages
Customer
Our progress
Residential
mortgage
customers
This product, launched in late October 2020, offers lower interest rates for
customers purchasing homes with an Energy Performance Certificate (EPC)
rating of A or B, rewarding them for playing their part in helping to drive the UK
transition to a low carbon economy.
Since launch, we have received 1,229 mortgage applications with the value
of £315 million.
Go Green Hub
All customers
Launched in July 2020, the Go Green Hub aims to motivate customers to make
behavioural changes – through providing educational and thought leadership
content as well as simple and accessible tools and resources to help customers
better understand their own environmental impact. In addition, it signposts
solutions, products and services to help customers manage and reduce their
environmental impact.
Private Banking
Green Mortgages
Residential
mortgage
customers
The Green Mortgage pilot was launched in November 2020. Customers qualify
for a discount on 2 Year Base Rate Tracker mortgages by demonstrating
that their property's Energy Efficiency Rating has increased to EPC rating
A, B, or C. The Green Mortgage discount is available up to 12 months after
completion, subject to the customer providing their relationship manager with
an upgraded EPC certificate.
Investments
– All invested
customers
Coutts Asset
Management – Target
to reduce the level of
carbon intensity for
the equity component
of their funds and
portfolios by 25% by
end of 2021
In the first half of 2020, Coutts Asset Management reduced the carbon intensity
on equity holdings of all funds and portfolios by 29% on average. This includes
the Personal Portfolio Funds (the investments for our NatWest Invest and Royal
Bank Invest digital investment platforms), which saw a reduction of 33% on
average. The 29% reduction resulted from deliberate action taken within the
funds and portfolios to shift to lower-carbon investments and by engaging with
the companies and funds we invest in to reduce their carbon emissions. Carbon
intensity is calculated as carbon emissions per million dollar of sales. Currently,
this is only measured for equity holdings as data availability for these holdings
is better than for other assets in the funds and portfolio. On average, equity
holdings make up 60% of the total assets in the funds.
In addition, Coutts Asset Management has divested from high-impact fossil
fuels in its Coutts funds managed by BlackRock. The Coutts funds exclude any
companies that derive more than 5% revenue from thermal coal extraction,
Arctic oil and gas exploration and tar sands, and more than 25% of revenue from
thermal coal energy generation.
70
Climate-related disclosures
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
1. Accelerating the speed of transition to a low carbon economy continued
Climate-related
opportunities
Commercial Banking
Future Mobility:
enabling electric
charging
infrastructure
Customer
Our progress
Retail and
commercial
customers
In February 2021, NatWest Group launched a partnership with Octopus Energy,
the UK's fastest growing energy technology company, to help make it simple for
customers and colleagues to move to electric vehicles (EVs).
The partnership promotes infrastructure delivery by providing a single managed
solution covering preferential pricing and encompassing full range of solutions from
simple consumer installation to multi-site with solar panels, battery storage and green
energy provision. The combination of NatWest Group's financing and Octopus’
energy innovation will help all our customers decarbonise their transport.
Future Mobility:
enabling fleet
transition
Various
NatWest Group has financed 73 pure e-buses by working with multiple operators
and the emerging ‘as-a-service’ ecosystem.
Benefits of electric transition were highlighted as part of NatWest Group’s colleague
company car scheme resulting in 66% of new vehicles being wholly powered by
battery; considerably ahead of the wider market.
Over 2020 the Lombard Vehicle Solutions car fleet has doubled the number of
vehicles that are wholly powered by battery.
Commercial real
estate lending
standards
Corporate
From January 2021, new minimum standards have been introduced in commercial
real estate lending appetite for residential new build lending, which requires
properties to achieve a minimum EPC rating of B.
In addition, standard lending terms for commercial real estate now include our
preference for green leases to be used by commercial landlords. Green leases are
a mechanism for landlords and tenants to agree to work together to improve the
sustainability of a building. Green leases will encourage better alignment of key
stakeholders involved in the commercial real estate sector, which we see as an
important step in moving towards net zero buildings.
NatWest Markets
Thought leadership
and education
Corporate and
Institutional
customers
NatWest Markets shared insights with customers and market participants,
including rating agencies, regulators, corporates, investors and industry experts to
address specific challenges in respect of climate change and related financing.
New product
innovation
Corporate and
Institutional
customers
NatWest Markets actively developed new and innovative products across
the yield curve to support green activities and customers’ transition journeys.
In collaboration with Commercial Banking, NatWest Markets structured the
first synthetic green securitisation based on a renewable energy loan portfolio
within the bank.
71
Climate-related disclosures
2. Helping to end the most harmful activity
Our ambition
Our Progress
Helping to
end the
most harmful
activity
We plan to stop lending and
underwriting to companies with
more than 15% of activities related
to thermal and lignite coal; unless
they have a credible transition
plan in line with the 2015 Paris
Agreement in place by end of
2021. We plan a full phase-out
from coal by 2030.
Also, to stop lending and
underwriting to major oil and
gas producers unless they have
a credible transition plan aligned
with the 2015 Paris Agreement in
place by the end of 2021.
Oil and gas gross lending exposure has reduced by £0.8 billion during 2020
(December 2020 £4.1 billion; December 2019 £4.9 billion). Large corporate
customers with gross lending exposure of £2 billion at December 2020 have been
identified as requiring Paris aligned and Credible Transition Plans (CTP) by the
end of 2021. This includes oil and gas majors and also customers engaged in coal
(thermal and lignite) related to mining, power generation and trading activities.
During 2020 we have worked with an external expert to define a methodology for
CTP assessment. The methodology comprises:
a) quantitative assessment using the climate scenario temperature alignment
model to evaluate whether companies transition plans and resulting projections
for Scope 1, 2 and 3 emissions are consistent with temperature scenarios that are
aligned to the goals of the 2015 Paris Agreement.
b) qualitative assessment of the credibility of customers’ transition plans through
use of a questionnaire and scorecard to be filled in by relationship managers
through public data and discussions with customers.
A proof of concept was completed for two customers and customer facing teams
are being trained to carry out CTP assessments. We expect to complete our review
of in scope customers by the end of 2021.
3. Championing climate solutions
Climate-related opportunities
Customer
Our progress
Championing
climate solutions
Climate and Sustainable
Funding and Financing:
Additional £20 billion climate and
sustainable funding and financing
between 2020-2021.
Non-personal
customers
During the year, £12 billion climate and sustainable
funding and financing has been completed. The £12 billion
comprises £7.2 billion in NatWest Markets, £3.9 billion in
Commercial Banking, £0.8 billion in RBS International and
£0.1 billion in other segments. We expect to exceed our £20
billion target during 2021.
At least 25% of the spaces in our
Accelerator Hubs will be reserved for
businesses whose core offering supports
sustainable environmental activities.
Entrepreneurs
Of the 1,085 businesses on-boarded to the Entrepreneur
Accelerator in 2020, 268 were businesses whose core
offering supports sustainable activity, which meets our
25% ambition.
4. Embedding climate into our culture and decision making
Our ambition
Our progress
Embedding
climate into
our culture
and decision
making
Revising executive remuneration
to reflect achievement of climate
targets.
Climate considerations were included in Senior Executive remuneration for the year
2020 and have been updated for 2021. Refer to the Governance and remuneration
report for further details.
We set ourselves the challenge to
at least halve the climate impact of
our financing activity by 2030, and
intend to do what is necessary to
achieve alignment with the 2015
Paris Agreement. To do this, we plan
to quantify our climate impact and
set sector-specific targets by 2022.
We will integrate the financial and
non-financial risks arising
from climate change into our
EWRMF.
We have developed financed emissions estimates for four sectors – residential
mortgages, oil and gas, automotive and agriculture. Also, developed emissions intensity
estimates for 2030 and 2050, for three of the four sectors.
NatWest Group was the first major UK bank to join Partnership for Carbon Accounting
Financials (PCAF). NatWest Group joined Science Based Targets initiative (SBTi)
following the launch of the Financial Sector Science- based Targets Guidance in 2020.
During 2020, work has continued to integrate climate risk within the Enterprise Wide
Risk Management Framework (EWRMF).
As part of the Environmental, Social and Ethical framework, coal lending thresholds for
the mining and metals, and power generation sectors were reduced from 40% to 15%. In
addition, prohibitions on project financing for new exploration in the oil and gas sector,
including fracking were put in place.
72
5. Making our own operations Climate Positive by 2025
Our ambition
Our progress
Climate-related disclosures
Making our
own operations
Climate Positive
by 2025
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Make our own operations Net
Zero Carbon in 2020 and Climate
Positive by 2025
NatWest Group achieved Net Zero Carbon across our own operations in 2020 (1).
We achieved this through a combination of emissions reductions, in line with our
1.5-degree science-based target commitment, alongside offsetting residual Scope
1, 2 and 3 emissions through the purchase of internationally recognised TIST
Carbon Credits. In recognition of the exceptional circumstances in 2020, we have
also offset all emissions from home working. We plan to achieve Climate Positive
by continuing to reduce emissions 25% by 2025 against a 2019 baseline, while
maintaining carbon offsetting at 2019 residual levels.
Use only renewable electricity in
our direct global operations by
2025 (RE100)
In 2020 we achieved our interim target of 90% renewable electricity coverage.
This was achieved through a combination of:
• 91% of our UK and RoI electricity is from renewable sources.
• Purchasing Renewable Energy Certificates (RECs) for our landlord-supplied
properties in India, Europe and the UK, where we are currently unable to specify a
requirement for renewable electricity.
Going forward, and in order to reach our target of 100% global renewable electricity
by 2025, we will work with our principal landlords to advocate for renewable
electricity provision for all properties, where possible.
Install electric vehicle charging
infrastructure in more than 600
spaces across our UK and RoI
portfolio by 2030 (EV100)
During 2020, 20 charge point connections were installed in Belfast and all remaining
sites were surveyed ready to deliver the rest of the programme. We have engaged
with a third party to support the programme roll out which will include the
installation of over 250 chargers at our Gogarburn Headquarters.
Upgrade our job need cars of
around 300 vehicles
to electric models by 2025
(EV100)
Improve Energy Productivity
40% by 2025 against a 2015
baseline (EP100)
During 2020 we set the strategy for transition and agreed vehicle criteria including
price, specification and range. From 2021, upon lease expiry of current diesel
vehicles and where homebased infrastructure allows, we will start providing
colleagues with an electric vehicle and home charge point.
We have increased energy productivity (FTE per GWh) by 36% since 2015. Our
EP100 target is supported by a decrease in energy consumption. Across our global
portfolio, electricity consumption decreased by 22% and natural gas consumption
decreased by 14% when compared to 2019.
(1) Our Own Operational Footprint reporting year runs from October 2019 to September 2020.
Climate scenario analysis
Refer to the 2020 Climate-related disclosures report for
further details on climate scenario analysis.
NatWest Group is taking significant steps to develop
scenario analysis capabilities to better understand and
act on the implications of climate-related risks and
opportunities for our business and customers. This aligns
with the increased regulatory supervisory expectations
on the management of climate-related risks using forward
looking climate scenarios. It will help to ensure we can meet
the requirements of the Bank of England 2021 Climate
Biennial Exploratory Scenario (CBES) regulatory stress
test that will explore the resilience of the financial system to
the physical and transition risks from climate change. This
section summarises some of the risks we have identified by
undertaking forward-looking climate scenario analysis and
how we plan to manage these risks.
During 2020, we have developed and tested a methodology
to use scenario analysis to quantify the size of a range of
climate-related risks and opportunities for our commercial
and retail customers. Since climate-related risks are
unevenly distributed and can be highly specific to either
locations or individual companies and assets, we have
taken a granular and customer specific modelling approach
as recommended in the Bank of England CBES 2021
Discussion Paper (December 2019). This first generation of
climate modelling will help to provide the foundation for our
scenario analysis capability build to support execution of
the CBES in June 2021.
Scenario analysis allows us to test a range of possible
future climate pathways and understand the nature
and magnitude of the risks they present. The purpose
of scenario analysis is not to forecast the future but to
understand and prepare to manage risks that could arise.
Climate data and sub-sector information availability,
accessibility, and suitability for financial risk analysis, as
well as climate-related risk modelling capabilities are still
nascent and evolving. The activity carried out in 2020 has
been the first step in what will be an ongoing development
of NatWest Group’s data, modelling and risk management
capabilities for managing climate-related risks.
Our approach to climate scenario analysis is
summarised below:
a. Our starting point for modelling climate-related risks
are three climate scenarios, each of which includes a
trajectory of carbon prices and emissions over time,
and an associated change in global temperature. These
are drawn from a set of scenarios published by the
Network of Central Banks and Supervisors for Greening
the Financial System (NGFS). NGFS has developed
the scenarios to provide a common starting point for
the financial sector to analyse physical and transition
climate-related risks.
73
Climate-related disclosures
The three scenarios analysed were: Hot House World
(no new policy action takes place to reduce greenhouse
gas emissions, and as a result they continue to grow),
Orderly (immediate and global action to reduce
emissions in a measured way) and Disorderly (ambitious
new climate policies are introduced, but only in 2030).
3. In scenarios with stronger climate action, there
is potential for large variation in companies’
performance within the same sector: Among
the companies tested, variation in climate impacts
between companies in the same sector can be as
large as variation between different sectors.
We examined the impacts of these three scenarios on
a selected sample from our balance sheet comprising
wholesale and retail customers.
b. Our analysis focused on both transition and
physical risks.
c. We translated each scenario into economic impacts for
firms and households. This is done by modelling granular
transition and physical risk shocks disaggregated by
sector and geography, and integrating this into a micro-
economic and financial model of firm-level impacts and
response, accounting for abatement and adaptation
action, and competitive dynamics within sectors.
d. We used the resulting flow of costs and revenues to
assess the impacts on the value of customers in the
NatWest Group’s portfolio, and used the existing credit
risk models (adapted to incorporate the climate-related
risk factors) to evaluate the impact on credit risk for the
individual customers.
e. Based on preliminary insights from the scenario
analysis work, we are working to develop response
plans, a number of which will require direct engagement
with our customers around their own mitigation plans.
We modelled physical and transition risks over the
period 2020-2050.
Scenario analysis insights
Recognising that the preliminary analysis carried out
over 2020 was the first step in a multi-year development
of capability and data with respect to climate scenario
analysis, any insights and observations must be treated
with appropriate caution. Sections below detail preliminary
insights and progress in assessment of initial management
plans to inform the development of the wider NatWest
Group climate strategy and risk management.
Wholesale insights
1. Climate-related risks can vary considerably
across sectors and companies. Among the sample
tested so far, in scenarios with stronger climate
action (‘Orderly’ and ‘Disorderly’), some companies
see an increase in expected market value with
others losing value. Since risks are distributed across
sectors and companies, NatWest Group’s diversified
lending portfolio is expected to limit the impact of
these variations.
2. While climate-related risks are distributed, some
sectors are particularly exposed e.g. automotive, oil
and gas, mining and metals. Companies in these sectors
can experience large changes in creditworthiness and
valuation in scenarios with stronger climate action.
NatWest Group is progressing work to assess financed
emissions related to loans and investment to these
sectors. In addition, we are engaging with customers
as part of the on-going work on CTP and other climate
ambition initiatives.
Differences in individual companies’ performance is
driven by factors such as differences in their current
carbon footprint and product mix. Recognising
these company-specific differences, NatWest Group
will continue to develop its granular customer-
level analysis of climate-related risks throughout
its portfolio. In addition, work is on-going to
train relationship managers as they engage with
customers to both manage risk and support their
transition.
4. New growth sectors and new opportunities: Many
companies perform significantly better in scenarios
with stronger climate action, including low carbon
utilities and cleantech manufacturers. As part of its
climate ambition, NatWest Group continues to support
customers through £20 billion climate and sustainable
funding and financing and by reserving at least 25%
of the spaces in our Entrepreneur Accelerator hubs
for businesses where their core offering supports
sustainable environmental activities (including climate
solutions). In addition, Commercial Banking has
introduced a framework to encourage activity that
supports the sustainability and climate change agenda.
As part of the capital allocation process, corporate
customers that are aligned with sustainability and
climate change benefit from a lower allocation of capital
allowing more competitive pricing. This benefit can
also be applied at an individual facility level where a
customer seeks funding for a specific, Climate Positive
activity (e.g. land transport business looking to fund
a fleet of EVs). This will help to reshape NatWest
Group’s portfolio as it moves towards more sustainable
transactions and sectors.
5. A disorderly transition would be most disruptive:
with a greater impact on valuations in the Disorderly
scenario than the Orderly scenario. In the disorderly
scenario, the economy has to change at a much faster
rate due to the action in cutting emissions commencing
a decade later and therefore greatly impacting high-
emitting sectors like energy. The impact on valuations
also exceeded those observed in the Hot House World
scenario.
Retail insights
1. Future climate-related risks amplify current risks. Initial
modelling with a limited sample indicates that physical
and transition risks will intensify over a period of time,
example properties with poor EPC ratings or those with
existing risk of flooding. NatWest Group has launched
various initiatives like Green Mortgages to support
customers transition to low carbon economy.
As part of its climate ambition, NatWest Group will work
with customers who are particularly exposed to improve
their energy efficiency.
2. Geographical diversification helps contain the impact
of physical risks. Since flood risk is highly geographically
specific, NatWest Group’s regionally diverse mortgage
portfolio limits exposure to a particular region in the UK.
74
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
3. There is significant regional variation in physical
hazards. Acknowledging this insight, in 2021 NatWest
Group will build more granularity into our flood risk
modelling to understand precisely where risks lie and
prepare management plans to address these insights.
4. Transition risks are more prevalent than flood risk,
which is concentrated in certain regions or properties.
This may impact property valuations as a result of rising
energy bills and retrofit costs for inefficient properties.
NatWest Group will continue to raise customers’
awareness of the importance of increasing the energy
efficiency of their homes.
Implications for risk management
and decision-making
We will continue to strengthen our ability to effectively
manage climate-related risks during 2021 and beyond, by
expanding our own analysis from an initial sample to cover
NatWest Group’s balance sheet more comprehensively,
in line with the 2021 CBES exercise requirements. We
will also further develop both our analytical tools and
implementation of climate-related risk insights into our
strategy and decision making.
Climate-related
disclosures – Governance
The Board and senior management team respectively
oversee and manage NatWest Group’s response to climate
change. Refer to the 2020 Climate-related disclosures
report for further details on climate governance.
Board oversight of climate-related
risks and opportunities
Board monitoring and oversight of climate-related risks
and opportunities is supported by management
reporting on climate, climate strategy, ambition and risk
management activities, which feature on the Board and
Board Committee agendas.
In particular,
• The Board oversees progress made on our Purpose-
led strategy announced in February 2020. In October
2020 the Board received a comprehensive update on
NatWest Group’s progress towards becoming a purpose-
led bank and progress against external sustainability
commitments, including the climate ambition, covering
achievements to date and future priorities.
• The Group Board Risk Committee discusses financial risk
from climate change on a quarterly basis. These updates
focus on risk-related matters such as scenario analysis
and stress testing, data and investment challenges.
• The Group Sustainable Banking Committee’s annual
deep dive session on climate change in June 2020
focussed on climate ambition this year, with external
input from the Green Finance Institute followed by a
challenge session with management on current progress
and future opportunities.
• The Group Performance and Remuneration Committee
oversaw the inclusion of Climate goals, performance
measures and targets as part of Senior Executive
remuneration for the 2020 financial year and updated
targets have been set for 2021.
• The Group Audit Committee considers non-financial
disclosures related to the broader ethical, social and
governance agenda.
75
Climate-related disclosures
Management’s role in assessing and managing
climate-related risks and opportunities
In October 2020 as part of a scheduled review, the Board
approved the allocation of Senior Management Function
responsibility for identifying and managing financial risks
from climate change jointly to the CEO and the Group Chief
Risk Officer. This updated accountability supports the
CEO’s ownership of our strategic climate purpose across
the organisation and will drive delivery across the three
lines of defence. This responsibility includes ensuring that
the financial risks from climate change are adequately
reflected in risk management frameworks, and that the firm
can identify, measure, monitor, manage, and report on its
exposure to these risks.
A Group-wide Climate Change Programme (GCCP)
continues to support the delivery of NatWest Group’s
climate-related objectives. The GCCP is overseen by an
Executive Steering Group (GCCP ESG) which is responsible
for coordinating the NatWest Group response across
climate-related regulations, risks and opportunities. The
GCCP ESG is co-chaired by the Group CEO and Group
Chief Risk Officer, reflecting the materiality of this agenda.
The GCCP ESG includes cross-franchise, functional and
entity representatives from across NWH Group and NWM
Group; and ensures alignment of underlying franchise
initiatives and working groups.
Climate-related disclosures –
Risk management
Climate risk is the risk of financial loss or adverse non-financial
impacts associated with climate change and the political,
economic and environmental responses to it.
The risks associated with climate change are complex
and pervasive. We recognise the cross-cutting causal nature
of climate risk and during 2020, continued to integrate climate
risk into the risk management framework. In addition, to
provide immediate focus, we have adopted a dual approach
and climate risk has also been recognised as a principal
risk. Refer to the 2020 Climate-related disclosures report for
further details on climate risk management.
Managing climate-related risks
During 2021 NatWest Group will assess and report
on climate risk as a principal risk. The risk will have a
dedicated policy, appetite statement and risk appetite
measures implemented in accordance with the EWRMF.
This approach supplements continued enhancements to
risk management toolkits which will ensure comprehensive
identification and assessment of climate risk impacts upon
other principal risks.
Some examples of work done during 2020 to incorporate
climate as a causal factor into existing principal risks
include:
• Guidance was issued to ensure appropriate
consideration of climate-related risk in internal risk and
control assessments.
• Climate risk was included as a factor in setting sector
oversight classifications, which drive the frequency and
level at which sector credit risk appetite is reviewed.
Within the wholesale portfolio, thirteen sectors were
identified as exposed to heightened climate risk based on
this initial analysis of transition and physical risks.
Climate-related disclosures
• For the residential mortgage portfolio analysis was
• Enhancements have been made to the ESE
completed at property level to assess transition risk by
reviewing energy efficiency of properties, and physical
risk though exposure to flood risk.
• Within operational risk, a scenario analysis pilot was
performed on the Group's operations in India to assess
the potential effects of climate driven events including
disruption to business services, damage to physical
assets and health and safety.
Framework to mitigate reputational risk from carbon
intensive sectors and support the transition to a low
carbon economy. This includes reduction in coal lending
thresholds for the mining and metals and power generation
sectors from 40% to 15%. In addition, prohibitions on
project financing for new exploration in the oil and gas
sector, including fracking were put in place.
Climate-related disclosures – Metrics and targets
This section includes metrics used by NatWest Group to assess climate-related risks and opportunities. Refer to the 2020
Climate-related disclosures report for further details on climate metrics and targets.
Heightened climate-related risk sectors
The table below summarises exposures to sectors identified as exposed to heightened climate-related risk impacts. Total
sector exposure comprises loans (gross loans and advances to customers and banks accounted at amortised cost and fair
value through other comprehensive income) and related off balance sheet exposures. Amounts reported include all lending
to customers including sustainable lending, as well as to environmentally responsible customers.
Heightened climate-related risk sectors
£m
Residential Mortgages (1)
Commercial Real Estate
Housing Associations
Automotive
Power Utilities
Land Transport and Logistics
Agriculture
Construction
Oil and Gas
Airlines and Aerospace
Building Materials
Shipping
Chemicals
Mining and Metals
2020
2019
Total Sector
Exposure
Total Sector
Exposure as % of
Total NatWest
Group
Total Sector
Exposure
Total Sector
Exposure as % of
Total NatWest
Group (2)
£m
%
£m
%
205,073
31,245
13,676
10,610
9,824
8,781
6,589
7,113
4,132
4,110
3,438
1,253
1,364
1,205
40.5%
188,351
40.5%
6.2%
2.7%
2.1%
1.9%
1.7%
1.3%
1.4%
0.8%
0.8%
0.7%
0.2%
0.3%
0.2%
30,761
12,549
10,138
9,271
7,396
6,041
5,449
4,907
3,700
2,836
1,585
1,401
1,256
6.6%
2.7%
2.2%
2.0%
1.6%
1.3%
1.2%
1.1%
0.8%
0.6%
0.3%
0.3%
0.3%
Total heightened climate-related sectors
Total NatWest Group (2)
308,413
506,034
60.9%
100.0%
285,641
464,736
61.5%
100.0%
(1) Includes a portion of secured lending in Private Banking, in line with Expected Credit Loss (ECL) calculation methodology.
(2) 2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020.
Total exposure to heightened climate-related risk sectors
has increased by £22.8 billion during 2020, primarily
relating to the following:
• Power utilities increased by £0.6 billion, primarily
reflecting new lending for renewable energy and
infrastructure projects.
• The increase in residential mortgages of £16.7 billion
reflected strong customer demand as well as the £3.0
billion acquisition of an owner-occupied mortgage
portfolio from Metro Bank.
Exposure also increased in several wholesale sectors,
primarily related to:
• Construction and land transport and logistics sectors
increased by £1.7 billion and £1.4 billion respectively,
reflecting the increased lending activity under the
COVID-19 government lending schemes.
76
• Housing associations increased by £1.1. billion, primarily
reflecting support for development of affordable homes.
• Exposure to the oil and gas sector has decreased
£0.8bilion, in line with tighter lending criteria and
increased focus on credible transition plans now in
place for this sector. At December 2020, exposure to oil
and gas majors amounted £1.3 billion (December 2019:
£1.4 billion).
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Climate-related disclosures
Climate and Sustainable Funding and Financing
In February 2020, NatWest Group announced that it would
support an additional £20 billion funding and financing
(including underwriting but excluding mergers and
acquisitions advisory activities) for climate and sustainable
finance between 2020-2022. As a result of the progress
made during 2020, the timeline for this target has been
brought forward to 2021. We expect to exceed our £20
billion target during 2021. NatWest Group used its 2020
Climate and Sustainable Finance Inclusion Criteria (CSFI
criteria) published in 2020 to determine the assets, activities
and companies that are eligible to be counted towards
this target. The CSFI criteria are currently focused on
supporting a transition towards a low carbon and climate
resilient economy.
The assets and activities which are in scope of the CSFI
criteria are in line with the eligibility criteria of one or more
of the ICMA Green Bond Principles (2018), Loan Markets
Association (“LMA”) Green Loan Principles, and relevant
transactions (that include a specific carbon or climate-
related metric) under the LMA’s Sustainability Linked
Loan Principles.
£12 billion climate and sustainable funding and financing
during 2020 comprised £7.2 billion in NWM Group,
£3.9 billion in Commercial Banking, £0.8 billion in RBS
International and £0.1 billion in other segments.
The table below shows our progress during 2020, compared with activity during 2018 and 2019 against previous target of
£10 billion climate and sustainable funding and financing related to these years. This demonstrates the increased support
provided to customers over the years to help transition to a low carbon economy.
Climate and Sustainable
Funding and Financing (1)
Number of deals
£m
Number of deals
£m
Green Wholesale lending (2): specific purpose lending
to customers within scope of the CSFI criteria
101
2,528
269
3,366
2020*
2018-2019
Green bond public issuances and green private
placements (3): underwriting of specific use of proceeds
debt capital market issuances for projects and clients
that meet the CSFI criteria
Sustainability Linked Loans: made to customers in line
with LMA sustainability linked loan principles where loan
targets include green performance indicators, aligned to
the CSFI criteria
36
5,030
27
3,721
28
2,633
35
2,850
Other wholesale general purpose lending or wider
financing within the CSFI criteria (4 )
21
1,823
Total Climate and Sustainable
Funding and Financing
186
12,014
331
9,937
(1) During 2020, the CSFI criteria excluded personal lending and NatWest Group own bond issuances. As a result, amounts related to these aren't included in the table
above. In early 2021, the CSFI criteria has been amended to provide additional clarity on existing criteria, and also to include lending to personal customers for properties
with EPC A and B ratings. The inclusion of personal customers in the CSFI criteria going forward does not impact the scope £20 billion climate and sustainable funding and
financing commitment, as set in 2020.
(2) Lending amounts represent total commitment and include any undrawn portion of committed credit limits.
(3) Green bond public issuance and green bond private placements represent the NWM Group share of the notional (total underwriting amount lead managed by
NWM Group), based on the number of underwriters within a specific deal. Green bonds and private placements totalling a notional amount of £22.7 billion, account for
approximately 4% of the total lead managed transactions by NWM Group during the year.
(4) In addition to transactions that directly meet CSFI criteria based on use of proceeds for green purposes, the CSFI criteria also includes certain general purpose loans and
wider financing to a customer who can evidence (to NatWest Group’s satisfaction through review of the customers’ profit and loss statement) 50% or more revenues from
the categories and sectors outlined in the criteria. In 2020, £1,823 million included above comprises loans of £428 million and bonds and private placements of £1,395 million.
(*) Within the scope of EY assurance. Refer to page 66.
77
Climate-related disclosures
NatWest Group Own Operational Footprint
In recognition of this exceptional year, we have:
We have met our ambition to be Net Zero Carbon (1) across
our own operations in 2020 (2). We achieved this through
a combination of emissions reductions, in line with our
1.5-degree science-based target commitment, alongside
offsetting residual Scope 1, 2 and 3(3) emissions through
the purchase of internationally recognised TIST Carbon
Credits (4).
NatWest Group understands that carbon offsetting is only
an interim solution; however, we believe it’s the best way
to take accountability for the carbon we emit until it can be
eliminated at source.
Climate Positive by 2025
Our priority now is to focus on becoming Climate Positive
across our own operations by 2025, so that we offset
more carbon than we emit. Last year we announced this
would be achieved by maintaining our 2020 level of carbon
offsetting and simultaneously reducing emissions from our
own operations a further 25% by 2025 (2019 baseline).
Due to the exceptional circumstances linked to the
COVID-19 pandemic, we have already reduced emissions
by 33% (against 2019 baseline), driven by reduced energy
consumption and business travel. Additionally, with more
than 50,000 colleagues working from home due to the
COVID-19 pandemic, some emissions have transferred to
colleague homes.
Streamlined Energy and Carbon Reporting
1) Calculated and offset all colleague home working and
commuting emissions (37,596 tCO2e). These additional
emissions offset in 2020 go beyond our current reporting
boundary of emissions in our direct operational control.
To calculate these emissions, we collaborated with
EcoAct, Lloyds Banking Group and other organisations
to launch the first ever open source home working
emissions methodology.
2) Set the minimum level of offsets that we will maintain
through to 2025 to 120,000 tCO2e, aligned to our 2019
market based emissions; instead of 2020 emissions
(93,144 tCO2e), which are lower than 2019.
3) We will continue to pursue a 25% carbon reduction
by 2025 (2019 baseline) due to an expected rebound
in the future.
Notes:
(1) NatWest Group define Net Zero Carbon as “a state where no incremental
greenhouse gases are added to the atmosphere, with remaining emissions
output being balanced by the removal of carbon from the atmosphere”
(2) Our Own Operational Footprint reporting year runs from October 2019 to
September 2020.
(3) Scope 3 emissions from business travel, paper, waste and water.
(4) TIST projects remove carbon from the atmosphere through tree planting. All
TIST carbon credits are dual-validated and verified under the Verified Carbon
Standard (VCS) and Climate, Community and Biodiversity Standards (CCB).
Greenhouse Gas (GHG) Emissions
UK and
Offshore (1) Area
Global Total
UK and
Offshore (1) Area
Global Total
2020*
2019
Emissions from the combustion of fuel and operation
of any facility (Scope 1(2) Direct) CO2e (tonnes)
Emissions from the purchase of electricity, heat,
steam or cooling by the company for its own use
(Scope 2(3) Indirect) location-based CO2e emissions
(tonnes)
Scope 2(4) (Indirect) Market-based CO2e emissions
(tonnes)
Total gross Scope 1 and Scope 2 emissions CO2e
(tonnes)
Scope 3(5) CO2e emissions from business travel, paper,
waste and water (tonnes)
Total gross CO2e emissions (Scope 1, location-based
Scope 2, Scope 3) (tonnes)
Energy consumption used to calculate above
emissions (kWh)
Intensity ratio: Location-based CO2e emissions per
FTE (Scope 1, 2 and 3) (tonnes/FTE)
18,960
21,110
17,445
20,684
63,166
90,944
81,392
125,127
8,709
14,627
12,941
54,182
82,126
112,054
98,837
145,811
14,550
19,811
32,163
49,613
96,676
131,865
131,000
195,424
353,624,334
427,528,477
417,541,093
565,600,065
2.159
2.091
2.747
2.935
Methodology: We have reported on all emission sources required under the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations
2018. Our reporting year runs from October 2019 to September 2020. The emissions reporting boundary is defined as all entities and facilities either owned or under our operational
control. (1) Offshore area as defined in The Companies (Directors Report) and Limited Liability Partnerships (Energy and Carbon) Regulations 2018. (2) Scope 1 Emissions from
fluorinated gas losses and fuel combustion in NatWest Group premises/ vehicles, (3) Scope 2 Emissions from electricity, district heating and cooling used in NatWest Group premises,
(4) Market-based Scope 2 Emissions and (5) Scope 3 Emissions associated with business travel by NatWest Group colleagues and paper, waste (UK and RoI) and water use have been
calculated using the Greenhouse Gas Protocol Corporate Standard and associated guidance. When converting data to carbon emissions, we use Emission Factors from UK
Government Emissions Conversion Factors for Greenhouse Gas Company Reporting (Department for Business, Energy & Industrial Strategy, 2020), CO2 Emissions from Fuel
Combustion (International Energy Agency, 2019) or relevant local authorities as required. For more information, please see our website (natwestgroup.com).
(*) Within the scope of EY assurance. Refer to page 66.
78
Energy Efficiency
Although the pandemic has impacted and delayed the
delivery of many energy efficiency and decarbonisation
investment projects, a number of key projects were still
completed in 2020. Notable highlights include:
• UK data centre environments – We replaced
the chillers that provide the necessary internal space
cooling at one of our data centres, reducing electricity
use by more than 600,000 kWh annually.
• Lighting upgrades – We have implemented lighting
upgrades at two of our major office buildings in Belfast
and London, resulting in a c.420,000 kWh electricity
reduction annually across both locations.
• UK and RoI retail branch upgrades – We have invested in
upgrading the equipment that serves our retail branches
Preliminary estimates of financed emissions
In February 2020, we set ourselves the challenge to at least
halve the climate impact of our financing activity by 2030
and to do what is necessary to achieve alignment with the
2015 Paris Agreement. Financing activity refers to the loans
and investments (debt securities and equity shares) on
NatWest Group’s balance sheet. We use financed emissions
as a key metric to estimate the climate impact of our
financing activity on the real economy. Financed emissions
are absolute GHG emissions that NatWest Group finances
through its lending and investment activity. These activities
fall within Scope 3, category 15 of the GHG protocol.
During 2020, we worked on developing our capabilities
to estimate our financed emissions to enable us to
enhance our understanding of climate-related risks and
opportunities. We focused on estimating financed emissions
and emissions intensities for four sectors: residential
mortgages, agriculture (primary farming), automotive
manufacturers and oil and gas extractors. These four
sectors were selected based on their proportion of the
NatWest Group’s total loans and investments as at 31
December 2019 in combination with climate impacts
associated with the sector. Further considerations included
whether appropriate methodologies for estimating
emissions intensities were available. Refer to the NatWest
Group 2020 Climate-related disclosures report for details
on approach, standards and methodologies used for
estimating financed emissions and emission intensities.
Calculation of financed emissions
Financed emissions refer to the total GHG emissions of an asset
class or sector that is attributable to NatWest Group. In line with
PCAF’s The global GHG accounting and reporting standard for
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Climate-related disclosures
during 2019-20, including boiler replacements to more
energy efficient models, upgrades to air conditioning
units and installation of building management systems
(BMS). We estimate that the installation of a
BMS in our branches, which optimises all the large
energy-using equipment, saves on
average 7,000 kWh annually, compared to
not having a BMS installed.
• UK Stand-by generation replacements – We have
removed older, more polluting diesel back-up generators
at two of our office locations in London and the South
East of England, as well as removing older generators at
one of our data centres. These projects will both reduce
carbon emissions and improve local air quality.
the financial industry, we have calculated absolute emissions
based on Scope 1 and 2 emissions attributable to those loans
and investments analysed for the specified sector or sub-
sector analysed. In addition, for our oil and gas extraction and
automotive manufacturing sectors, we have included
Scope 3 emissions based on downstream use of products sold
as they constitute a large proportion of the overall estimated
emissions in these sectors. In general, as per the PCAF
standard, financed emissions are estimated based on the
formula shown below:
The attribution factor is calculated by determining the
share of the outstanding amount of loans and investments
of a financial institution over the total equity and debt
of the borrower or investee company. We used total
assets to calculate the attribution factor for automotive
manufacturing and oil and gas, and original property
valuation for residential mortgages.
Currently, there are data limitations primarily related to
lack of granular and sub-sector customer data availability.
The PCAF standard provides guidance on data quality
scoring methodology to help assess data quality challenges
and recognise areas for improvement. PCAF’s ratings
generally assign directly collected customer emissions data
a better score and estimated or extrapolated achieve lower
scoring. In practice, data limitations mean that sectors are
generally footprinted using a mixture of customer specific
and estimated data at a sub sector level. PCAF therefore
suggests assigning a ‘weighted’ score to reported sectors
based on the relative exposure associated with different
methodologies.
Financed emissions
=
Attribution factor
i
x Emissions
(with i = borrower or investee)
i
Outstanding amount
i
Total equity + debt i
79
Climate-related disclosures
The table below shows our preliminary estimates based on our work to date and should be read in conjunction with Risk
factors included in this document and Section 5.7 (Caution about climate metrics) of the 2020 Climate-related disclosures
report. The table below shows NatWest Group’s (i) estimated financed emissions, (ii) physical and economic emissions
intensities (1) for the four sectors reviewed, (iii) preliminary physical emissions intensity estimates for year 2030 aligned
to NatWest Group’s climate ambition to reduce climate impact of financing activity by 50%, as well as for Paris alignment,
(iv) Paris alignment physical emissions intensity in 2050. We will continue to work on this in 2021 and further refine our
estimates as we enhance our understanding, calculation methodologies and data. We have used a combination of
methodologies (some of which are still under development) to calculate these emissions. Analysis performed during
2020 is based on NatWest Group loans and investments balances as at 31 December 2019.
Preliminary estimates of financed emissions
and emission intensities 2019 (1)
Preliminary emission intensity
estimates 2030 and 2050
Sector
Financed
emissions
(MtCO2e/y) (2)
Physical
emissions
intensity (3)
PCAF Data
quality score
Economic
emissions
intensity
(tCO2e/£M
invested) (4)
Proposed
50% absolute
emissions
reduction
intensity
(2030)
Paris
alignment
emissions
intensity
(2030)
Paris
alignment
emissions
intensity
(2050)
Scope 1
and 2
Scope
3
Scope 1
and 2
Scope
3
Residential
mortgages (5)
2.2
39 kgCO2e/m2
12
4.1
19 kgCO2e/m2
20 kgCO2e/m2 0.1 kgCO2e/m2
Agriculture(6)
(primary farming)
3.6
2,205 tCO2e/
£m revenue
940
4.3
1,103
tCO2e/£m
revenue
1,449
tCO2e/£m
revenue
1,165
tCO2e/£m
revenue
Automotive
manufacturing (7)
0.01
0.53
168 gCO2/km
1,790
2.1
3.1
84 gCO2/km
121 gCO2/km 31 gCO2/km
Oil and gas
extraction (8)
0.08
1.9
75 tCO2e/TJ
3,054
2.4
2.6
38 tCO2e/TJ
Guidance
under
development
Guidance
under
development
(1) Emissions intensity refers to emissions relative to a specific business metric, such as production output or financial performance of a company (e.g. tonne CO2e per tonne
product produced or revenue).
(2) Million tonnes of carbon dioxide equivalent, a measure used to compare the emissions from different greenhouse gases.
(3) Physical emissions intensity: Financed emissions divided by an output value.
(4) Economic emissions intensity: Financed emissions divided by the loan and investment amount. This helps understand how the emissions intensity of different portfolios
(or parts of portfolios) compare to each other per monetary unit.
(5) For residential mortgages, floorspace varies between properties and larger properties tend to produce a larger quantity of absolute emissions as a result, floorspace
has been used as the metric for assessing physical emissions intensity kgCO2e/m2 is kilograms carbon of carbon dioxide equivalent emitted per square meter.
(6) Where detailed information on physical activity is not available, PCAF permits use of revenue-based intensity. We have used revenue based intensity metric for the
agriculture sector. tCO2e/£M revenues is tonnes of carbon dioxide equivalent emitted per million of revenue.
(7) For automotive manufacturing, emissions intensity is based on kilometres travelled as this reflects the emissions for distance travelled. For automotive manufacturing,
Scope 3 emissions and emission intensity estimates only relate to tailpipe emissions i.e. the emissions exclusively related to the burning of fuel in vehicles and do not take
into account entire lifecycle emissions. gCO2/km is the grams of carbon dioxide emitted per kilometre.
(8) For oil and gas extraction, quantity of energy produced by each fuel source has been used to assess emissions intensity. tCO2e/TJ is tonnes of carbon dioxide equivalent
emitted per terajoule.
80
Residential mortgages
Reducing emissions associated with our residential
mortgage portfolio will be critical to meeting our climate
ambitions. The analysis presented is based on residential
mortgages of £174 billion at December 2019.
In February 2020, NatWest Group committed to support our
UK and RoI mortgage customers to become more energy
efficient with an ambition that 50% of our mortgage book is
at or above EPC C or equivalent rating by 2030. To estimate
financed emissions, we used EPC data as an estimate of
the underlying climate impact. EPC assesses the energy
efficiency of a property, graded from A (most efficient) to G
(least efficient). EPC data is sourced from publicly available
customer information for England and Wales for the year
of inspection by qualified EPC surveyor. As EPC ratings
only need to be updated every 10 years or after significant
retrofits, point of sale or lease, not all properties have
current EPC ratings.
Financed emissions estimates: For the purpose of
calculating financed emissions estimates, EPC data has
not been adjusted for any assumed energy efficiency
changes since the date of collection. For Scope 2 financed
emissions estimates, EPC data collected prior to 2019 has
been adjusted only for the decarbonisation of the UK grid
between the year of inspection and 2019.
PCAF data quality score: Our residential mortgages
estimate achieves a weighted PCAF data quality score of
4.1. The weighting is based on two scores:
a. Publicly available data: As at December 2019, EPC
data was available for just under half of the residential
mortgage portfolio which achieved a PCAF data quality
score of 3.
b. Extrapolated data: To estimate EPC ratings for
properties which did not have publicly available EPC
data, we used average emissions profile of properties for
which EPC data was available.
This is based on the assumption that properties without
EPC ratings have the same emissions intensity profile as
those with available EPC ratings. This results in PCAF data
quality score of 5.
Agriculture
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Climate-related disclosures
Estimated 2030 and 2050 emissions intensity: Our
preliminary estimates for the Paris aligned emissions
intensities for 2030 and 2050 are based on the CCC's sixth
Carbon Budget, “Balanced Net Zero”, emissions pathway
and UK floorspace projections. We project floor space to
2050 using the CCC's estimates of “new homes” in the
UK between 2019 and 2050, in conjunction with the UK’s
housing stock in 2019.These are then multiplied by the
average floorspace in the UK (as derived from the National
EPC data). The current Scope 2 estimate is based on CCC’s
estimated household electricity consumption and the
overall emissions intensity of UK electricity. The intensity
estimate was calculated using SBTi SDA. We estimate
that by 2030, our average financed physical emissions
intensity will need to fall significantly to be aligned with the
2015 Paris Agreement, from an estimated 39 kgCO2e/m2 in
2019 to 20 kgCO2e/m2 in 2030, and then further still to 0.1
kgCO2e/m2 in 2050.
How we will support customers to transition
Our ambition for Paris alignment for the residential
mortgage portfolio is challenging. It reflects the fact that
reducing the carbon emissions from residential property
in the UK is a complex and challenging goal, which will
require a systemic response from parties across the sector,
including government, energy suppliers, housebuilders and
lenders. We have a clear role to play within the ecosystem
to engage and inform customers and provide product
solutions to fund home improvements and continue to
develop our plans.
We are clear that we can play an important role engaging
with our mortgage customers to inform and increase
awareness of the benefits and options available, helping
them to improve home energy efficiency through making
home improvements. Building on the launch of our Green
Mortgage product, we will continue to develop green
financial products to reward and incentivise the purchase
of the most energy efficient properties, measured by
their EPC, but also to allow customers to fund home
improvements that increase the energy efficiency of
existing properties. We will also take a proactive stance
to sector engagement, working with government, as
well as across the finance sector with NGOs (e.g. Green
Finance Institute) to align to industry standards and create
consistency for customers regarding Green Financing.
Customers engaged in primary farming activity with
lending and investments of £3.8 billion were reviewed to
estimate financed emissions.
and detailing supply use tables for a large number of
countries, estimating emissions, and resource extractions
by industry.
Financed emissions estimate: As primary farming
activities do not have a homogenous unit of output base (i.e.
farmers sell different products), constructing an emissions
intensity metric based on physical output is challenging.
We have used UK-specific sector level revenue emissions
intensity metrics from EXIOBASE 2011 and applied these
to customer revenues to estimate absolute emissions.
Availability of more detailed customer level data will allow
us to use customer specific emissions factors.
EXIOBASE is a global, detailed multi-regional
environmentally extended supply use table and input-
output table. EXIOBASE was developed by harmonizing
We have included five GHGs (carbon dioxide, methane,
nitrous oxide, hydrofluorocarbons (HFCs) and
perfluorocarbons (PFCs)) from EXIOBASE in our emissions
estimates. In line with the CCC’s sixth carbon budget, we
use the 'high' global warming potential (GWP) values with
carbon-cycle feedbacks for methane and nitrous oxide
from the IPCC 5th Assessment Report. Carbon cycle
feedback refers to how the collection of processes that
sees carbon exchanged between the atmosphere, land,
ocean and organisms could change as the Earth warms and
atmospheric CO2 concentrations rise.
81
Climate-related disclosures
PCAF data quality score:
a. Publicly available data: Emissions intensity
for £2.5 billion of agriculture primary farming balances
reviewed was estimated using sector level emissions
factors from EXIOBASE, achieving data quality score of
4.
b. Estimated data: For the remaining £1.3 billion balance,
we applied the emissions intensity profile available in a
above, achieving a data quality score of 5.
This results in overall weighted data quality score of 4.3. To
improve the quality of data inputs for the agriculture sector
in future years, we plan to collect data on production and
processes from agricultural customers to better measure
their carbon footprint and track progress over time.
According to the CCC’s sixth carbon budget, decreasing
emissions in the agriculture sector will be driven by
several decarbonisation strategies, such as improved soil
management practices, improved livestock health and
breeding, reductions in food waste and diet changes that
will reduce the demand for and production of beef and thus,
the associated emissions.
Emission intensity estimates for 2030 and 2050: Currently,
there is limited guidance on modelling Paris aligned
emissions intensities for agriculture, with the SBTi guidance
on agriculture, forestry and other land use (AFOLU) due to
be released in Q2 2021. For the 2030 and 2050 preliminary
emissions intensity estimates, we have used Scope 1 and
2 emissions pathways from the CCC sixth Carbon Budget.
We constructed revenue projections for the agriculture
sector in the UK to 2050 based on the assumption that food
demand grows in line with the World Bank's population
forecasts for the UK. Based on this approach, the emissions
intensity of NatWest Group’s agriculture portfolio would
need to reduce from 2,205 tCO2e/£m revenue to 1,449
tCO2e/£m revenue in 2030 to be on track to meet the 2015
Paris Agreement goals.
From a wider market perspective, the UK National Farmers
Union has set the ambitious goal of reaching net zero GHG
emissions across the whole of agriculture in England and
Wales by 2040, and are aligning measures under three
broad headings:
• Improving farming’s productive efficiency;
• Improving land management and changing land use to
capture more carbon;
• Boosting renewable energy and the wider bioeconomy.
The NFU have stated that in reducing agriculture’s impact
on climate, the UK must not achieve its climate change
ambitions by exporting UK production, or our GHG
emissions, to other countries. NatWest Group is actively
exploring opportunities for GHG emissions reductions in
agriculture aligned with the UK Agricultural Bill/Act and
the transition to the Environmental Land Management
Schemes (ELMSs) in England and corresponding
schemes in the devolved nations. Possible options include
assisting farmers in changes of land use and increasing
sequestration uptake by our customers.
NatWest Group is committed to supporting our specialist
relationship managers with climate-related training,
and climate-related questions are being added to our
agriculture sector customer engagement. These measures
will support the consistent coverage of climate issues
in future collaborations with customers, with the aim to
support and help them transition to a low carbon resilient
economy.
We are currently working on a pilot with individual
farming customers to develop a universal approach in
understanding the sustainability and climate impact of their
farms. If successful, further development will enable the
bank to understand the impact of our agriculture portfolio
whilst providing our farming customers with individual
support on their climate journey.
Automotive manufacturing (cars and light commercial vehicles)
Financed emissions estimates: NatWest Group absolute
financed emissions in automotive manufacturing includes
Scope 1, Scope 2 and Scope 3 tailpipe emissions. This
is based on £0.3 billion loans and investments related to
automotive manufacturers at December 2019. Scope 1 and
Scope 2 emissions were taken directly from customers’
sustainability reports.
In addition, Scope 3 tailpipe emissions have been included,
aligned with the Katowice Banks guidance (1). Tailpipe
emissions refer to emissions exclusively related to the
burning of fuel in vehicles and do not take into account
entire lifecycle emissions. As the reporting for Scope 3
tailpipe emissions is not uniform across all customers,
we estimate it using average tailpipe emissions factors
for car model and fuel combinations from the Worldwide
Harmonised Light Vehicle Test Procedure (WLTP), a global
harmonised standard of drive cycle test to determine the
tailpipe emissions and fuel efficiency of passenger cars.
These tailpipe emissions factors are applied to global sales
data (by model type) taken from customers’ annual reports
to calculate Scope 3 tailpipe emissions.
In line with guidance from Katowice banks, we also estimate
the Scope 3 tailpipe emissions intensity (in gCO2/km) for
our automotive manufacturing portfolio. This is calculated
based on the estimated Scope 3 tailpipe emissions, data on
customer financials and reported sales, and an assumption
of average vehicle lifecycle of 150,000 kms based on the
IEA Global EV Outlook report.
(1) Katowice Banks refers to the five international banks that pledged at the
2018 COP24 in Katowice to develop an open-source methodology to
progressively steer (or ‘align’) their lending portfolios with the goals of the
2015 Paris Agreement. In September 2020, 2 Degrees Investing Initiative
(2DII) and the Katowice Banks launched their Credit Portfolio Alignment
methodology for applying the 2015 Paris Agreement Capital Transition
Assessment (PACTA) methodology to banks’ credit lending portfolios.
82
Climate-related disclosures
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
PCAF data quality score:
a. Scope 1 and Scope 2:
(i) Publicly available data: We were able to use data from
customers’ externally available disclosures for 97%
customers. This achieved data quality score of 2.
(ii) Extrapolated data: For the remaining 3%, we estimated
emissions data based on the emissions profile of the rest
of the population, achieving data quality score of 5.
This results in overall data quality score of 2.1.
b. Scope 3: As above, for 97% of our Automotive
manufacturing portfolio, we estimated the Scope 3
tailpipe financed emissions using emissions factors from
WLTP and the reported global sales by customers. For
the rest of the portfolio, we extrapolate Scope 3 tailpipe
emissions based on the 97% population for which
information is available. This achieved a data quality
score of 3.1.
Estimated 2030 and 2050 emissions intensity: The 2030
and 2050 preliminary intensity estimates are based on
vehicle sales by fuel type using the global vehicle stock
projections from the IEA Energy Technology Perspectives
(ETP) Beyond 2 Degrees Scenario (B2DS). Key assumptions
include those related to operational lifetime of vehicles and
replacement rates by fuel type, based on the IEA Global EV
Outlook. In addition, we have assumed a constant vehicle
efficiency by fuel type i.e. that the grams of CO2 per km
emitted by cars of a fuel type remains constant until 2050,
informed by the 2019 BEIS emissions factors for an average
vehicle (split by fuel type). Vehicle emission factors by
fuel type are applied to construct a weighted average
emissions intensity for new vehicles sales to 2050. The
preliminary emissions intensity estimates suggest that EV
sales would need to be approximately 45% (as a top-end
estimate) of total global sales by 2030, to achieve Paris
alignment, based on the assumptions listed above.
A switch from internal combustion engine vehicles to
EVs will play a key role in achieving Paris alignment
in the automotive sector. In November 2020, the UK
Government made a commitment to further support EV
manufacturing as part of a £2.8 billion investment, which
will greatly support the sector transition. In addition, the UK
Government announced that new cars and vans powered
wholly by petrol and diesel will not be sold in the UK from
2030. NatWest Group’s Future Mobility Group has launched
various initiatives to support customers and colleagues.
Oil and gas extraction
Financed emissions estimate: In the oil and gas sector, we
calculated financed emissions for customers engaged in
extraction activities. In addition, we have included Scope 3
emissions in our financed emissions estimates for the oil and
gas extraction sub-sector, as these have a high climate
impact. This is in line with the Katowice Banks guidance.
We used reported emissions and production data from our
customers' annual reports (where available) to construct
emissions intensity estimates for 2019.
PCAF data quality score:
a. Publicly available data: For 96% customers, we sourced
Scope 1, Scope 2 and Scope 3 emissions data from their
sustainability reports. Where any of this information
was missing, we estimated the emissions using reported
production and estimated emissions factors. For directly
sourced emissions, we achieve a data quality score of 2
whereas for the portion of the portfolio that we estimate
the emissions for, we achieve a data quality score of 3.
b. Extrapolated data: For the rest of the portfolio (4%), we
extrapolated the estimated financed emissions based on
the population for which data is available. This achieved a
data quality score of 5.
This achieved overall data quality score of 2.4 for Scope 1
and 2, and 2.6 for Scope 3.
We have not yet developed a Paris aligned emissions pathway
to 2050, as SBTi guidance for the oil and gas sector is still
under development. We continue to liaise with SBTi on this.
During 2020, we have continued to reduce our
loan and investments in the oil and gas sector from £2.1 billion
to £1.6 billion primarily due to tighter lending criteria. During
2021, we will work with major oil and gas customers as part of
the credible transition plan work to assess future actions. We
expect further reductions in 2021 and beyond based on tighter
lending criteria for the sector and the ongoing assessment
of customers’ transition plans. We continue to support our
selected customers in the North Sea oil and gas sector as
they focus on reducing emissions, transitioning to low carbon
energy solutions and decommissioning.
83
Business review
Presentation of information
Segmental reporting
Financial summary
Segment performance
Page
84
84
85
90
Presentation of information
The Royal Bank of Scotland Group plc or the ‘parent company’ was
renamed NatWest Group plc on 22 July 2020.
In the Report and Accounts, unless specified otherwise, ‘parent
company’ refers to NatWest Group plc, and ‘NatWest Group’ or
‘Group’ refers to NatWest Group plc and its subsidiaries. The term
‘NWH Group’ refers to NatWest Holdings Limited (‘NWH’) and its
subsidiary and associated undertakings. The term ‘NWM Group’
refers to NatWest Markets Plc (‘NWM Plc’) and its subsidiary and
associated undertakings. The term ‘NWM N.V.’ refers to NatWest
Markets N.V. The term ‘NWMSI’ refers to NatWest Markets
Securities, Inc. The term ‘RBS plc’ refers to The Royal Bank of
Scotland plc. The term ‘NWB Plc’ refers to National Westminster
Bank Plc. The term ‘UBI DAC’ refers to Ulster Bank Ireland DAC.
The term ‘RBSI Limited’ refers to The Royal Bank of Scotland
International Limited.
NatWest Group publishes its financial statements in pounds sterling
(‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions
and thousands of millions of pounds sterling, respectively, and
references to ‘pence’ represent pence in the United Kingdom (‘UK’).
Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’)
dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and
thousands of millions of dollars, respectively, and references to
‘cents’ represent cents in the US. The abbreviation ‘€’ represents the
‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent millions and
thousands of millions of euros, respectively, and references to
‘cents’ represent cents in the European Union (‘EU’).
To aid readability, this document retains references to EU legislative
and regulatory provisions in effect in the UK before 1 January 2021
that have now been implemented in UK domestic law. These
references should be read and construed as including references to
the applicable UK implementation measures with effect from 1
January 2021.
Segmental reporting
UK Personal Banking was renamed Retail Banking with effect from
September 2020.
Reportable operating segments
The reportable operating segments are as follows.
Retail Banking; serves individuals and mass affluent customers in
the UK and includes Ulster Bank customers in Northern Ireland.
Ulster Bank RoI; serves individuals and businesses in the Republic
of Ireland (RoI).
Commercial Banking; serves start-up, SME, commercial and
corporate customers in the UK.
B
u
s
i
n
e
s
s
R
e
v
i
e
w
Private Banking; serves UK connected high net worth individuals
and their business interests.
RBS International (RBSI); serves retail, commercial, and corporate
customers in the Channel Islands, Isle of Man and Gibraltar, and
financial institution customers in those same locations in addition to
the UK and Luxembourg.
NatWest Markets (NWM); helps NatWest Group’s corporate and
institutional customers manage their financial risks safely and
achieve their short-term and long-term sustainable financial goals.
Central items & other; includes corporate functions, such as
NatWest Group Treasury, finance, risk management, compliance,
legal, communications and human resources. Central functions
manages NatWest Group capital resources and NatWest Group-
wide regulatory projects and provides services to the reportable
segments.
Allocation of central items
NatWest Group allocates all central costs relating to Services and
Functions to the business using appropriate drivers, these are
reported as indirect costs in the segmental income statements.
Assets and risk-weighted assets held centrally, mainly relating to
NatWest Group Treasury, are allocated to the business using
appropriate drivers.
Non-IFRS financial information
NatWest Group prepares its financial statements in accordance with
the basis set out in the accounting policies, page 264, which
constitutes a body of generally accepted accounting principles
(GAAP).This document contains a number of adjusted or alternative
performance measures, also known as non-GAAP or non-IFRS
performance measures. These measures are adjusted for certain
items which management believe are not representative of the
underlying performance of the business and which distort period-on-
period comparison. The non-IFRS measures provide users of the
financial statements with a consistent basis for comparing business
performance between financial periods and information on elements
of performance that are one-off in nature. The non-IFRS measures
also include the calculation of metrics that are used throughout the
banking industry. These non-IFRS financial measures are not
measures within the scope of IFRS and are not a substitute for IFRS
financial measures. Refer to the section, ‘Non-IFRS financial
measures’, on pages 339 to 342 for further information and
calculations of non-IFRS financial measures included throughout this
document, and, where relevant, the most directly comparable IFRS
financial measures.
Business Developments
In December 2020, we acquired a £3.0 billion portfolio of prime UK
mortgages from Metro Bank plc. Growing the mortgage book is an
important strategic priority, as NatWest Group builds a bank that
delivers sustainable returns for shareholders. The addition of this
loan book will supplement the strong organic growth that we
continue to achieve.
NatWest Group Annual Report and Accounts 2020
84
Business review
Financial summary
NatWest Group’s financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the last five years is
presented below.
Summary consolidated income statement
Net interest income
Non-interest income
Total income
Operating expenses
Profit/(loss) before impairment losses
Impairment losses
Operating (loss)/profit before tax
Tax charge
(Loss)/profit for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Dividend access share
Paid-in equity holders
Non-controlling interests
2020
£m
7,749
3,047
10,796
(7,905)
2,891
(3,242)
(351)
(83)
(434)
(753)
26
—
355
(62)
(434)
2019
£m
8,047
6,206
14,253
(9,325)
4,928
(696)
4,232
(432)
3,800
3,133
39
—
367
261
3,800
Performance key metrics and ratios
Return on tangible equity (%)
Bank NIM (NatWest Group NIM excluding NWM) (%) (1)
Average interest earning assets (NatWest Group excluding NWM) (£m)
Cost:income ratio (%) (2)
Earnings per share (pence) - basic
2020
(2.4)
1.71
455,542
72.9
(6.2p)
2019
9.4
1.99
413,112
65.1
26.0p
2017
£m
8,987
4,146
13,133
(10,401)
2,732
(493)
2,239
(731)
1,508
752
234
—
487
35
1,508
2016
£m
8,708
3,882
12,590
(16,194)
(3,604)
(478)
(4,082)
(1,107)
(5,189)
(6,955)
260
1,193
303
10
(5,189)
B
u
s
i
n
e
s
s
R
e
v
i
e
w
2018
£m
8,656
4,746
13,402
(9,645)
3,757
(398)
3,359
(1,208)
2,151
1,622
182
—
355
(8)
2,151
Variance
(11.8)
(28bps)
42,430
7.8
(32.2p)
Notes:
(1) Net interest margin is net interest income of the banking business less the NatWest Markets (NWM) element as a percentage of interest-earning assets of the
banking business less the NWM element.
(2) Cost:income ratio is total operating expenses less operating lease depreciation divided by total income less operating lease depreciation.
Summary consolidated balance sheet
Cash and balances at central banks*
Trading assets
Derivatives
Settlement balances
Loans to banks and customers - amortised cost*
Other financial assets
Other and intangible assets
Total assets
Deposits
Trading liabilities
Settlement balances, derivatives, and other financial liabilities
Other liabilities
Owners' equity
Non-controlling interests
Total liabilities and equity
2020
£m
124,489
68,990
166,523
2,297
367,499
55,148
14,545
799,491
452,345
72,256
222,023
9,043
43,860
(36)
799,491
2019
£m
80,993
76,745
150,029
4,387
334,501
61,452
14,932
723,039
389,740
73,949
206,147
9,647
43,547
9
723,039
2018
£m
91,368
75,119
133,349
2,928
315,565
59,485
16,421
694,235
384,211
72,350
182,230
8,954
45,736
754
694,235
2017
£m
100,724
85,991
160,843
2,517
319,246
51,929
16,806
738,056
391,712
81,982
200,398
14,871
48,330
763
738,056
2016
£m
76,608
86,660
246,981
5,526
318,658
48,637
15,586
798,656
357,173
84,536
267,257
40,286
48,609
795
798,656
*Prior period data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January
2020 for further details.
NatWest Group Annual Report and Accounts 2020
85
Business review
Financial summary continued
Segmental summary income statements
2020
Net interest income
Non-interest income
Total income
Other expenses
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment losses
Operating profit/(loss)
Return on equity (1)
Cost:income ratio (2)
Average interest earning assets
Third party customer asset rate (3)
Third party customer funding rate (3)
2019
Net interest income
Non-interest income
Total income
Other expenses
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment (losses)/releases
Operating profit/(loss)
Return on equity (1)
Cost:income ratio (2)
Average interest earning assets
Third party customer asset rate (3)
Third party customer funding rate (3)
Retail
Banking
£m
3,868
313
4,181
(2,295)
(226)
(19)
(2,540)
(792)
849
10.2%
60.8%
181,383
2.89%
(0.19%)
4,130
736
4,866
(2,403)
(290)
(925)
(3,618)
(393)
855
9.6%
74.4%
167,186
3.23%
(0.37%)
Ulster Bank
RoI
£m
395
115
510
(454)
(25)
(7)
(486)
(250)
(226)
(11.7%)
95.3%
26,352
2.30%
(0.07%)
400
167
567
(470)
(60)
(22)
(552)
34
49
2.3%
97.4%
25,100
2.28%
(0.09%)
Commercial
Banking
£m
2,740
1,218
3,958
(2,261)
(179)
10
(2,430)
(1,927)
(399)
(4.5%)
59.9%
163,143
2.86%
(0.08%)
2,842
1,476
4,318
(2,236)
(302)
(62)
(2,600)
(391)
1,327
8.4%
58.9%
145,933
3.36%
(0.19%)
Private
Banking
£m
489
274
763
(466)
(15)
26
(455)
(100)
208
10.3%
59.6%
23,806
2.53%
(0.11%)
521
256
777
(439)
(38)
(9)
(486)
6
297
15.4%
62.5%
21,689
2.93%
(0.35%)
RBS
International
£m
371
126
497
(244)
(49)
2
(291)
(107)
99
6.1%
58.6%
31,700
2.52%
(0.01%)
478
132
610
(244)
(20)
—
(264)
(2)
344
25.7%
43.3%
29,912
2.89%
(0.11%)
NatWest Central items
& other
Markets
£m
£m
(57)
(57)
(179)
1,180
(236)
1,123
(21)
(1,038)
(252)
(267)
(120)
(5)
(393)
(1,310)
(26)
(40)
(655)
(227)
nm
(3.8%)
nm
116.7%
nm
37,929
nm
nm
nm
nm
(188)
1,530
1,342
(1,178)
(222)
(18)
(1,418)
51
(25)
(3.2%)
105.7%
35,444
nm
nm
(136)
1,909
1,773
(79)
(449)
141
(387)
(1)
1,385
nm
nm
nm
nm
nm
Total
NatWest
Group
£m
7,749
3,047
10,796
(6,779)
(1,013)
(113)
(7,905)
(3,242)
(351)
(2.4%)
72.9%
493,471
nm
nm
8,047
6,206
14,253
(7,049)
(1,381)
(895)
(9,325)
(696)
4,232
9.4%
65.1%
448,556
nm
nm
B
u
s
i
n
e
s
s
R
e
v
i
e
w
Notes:
(1) NatWest Group’s CET1 target is approximately 14% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers
of capital usage, segmental operating profit adjusted for preference share dividends and tax is divided by average notional equity allocated at different rates of
14.5% (Retail Banking - 15% prior to Q1 2020), 15.5% (Ulster Bank RoI - 15% prior to Q1 2020), 11.5% (Commercial Banking - 12% prior to Q1 2020), 12.5%
(Private Banking - 13% prior to Q1 2020), 16% (RBS International) and 15% for all other segments, of the period average of segmental risk-weighted assets
equivalents (RWAe) incorporating the effect of capital deductions. NatWest Group return on equity is calculated using profit for the period attributable to ordinary
shareholders. Refer to the Non-IFRS financial measures section for details of the basis of preparation.
(2) Operating lease depreciation included in income £145 million (2019 - £138 million). Refer to the Non-IFRS financial measures section for details of the basis of
preparation.
(3) Third party customer asset rate is calculated as annualised interest receivable on third-party loans to customers as a percentage of third-party loans to
customers only. Third party customer funding rate reflects interest payable on third-party customer deposits, including interest bearing and non-interest bearing
customer deposits. This excludes intragroup items, loans to banks and liquid asset portfolios. Intragroup items, bank deposits and debt securities in issue are
excluded for customer funding rate calculation. Comparatives have been restated. Net interest margin is calculated as net interest income as a percentage of
the average interest-earning assets without these exclusions.
NatWest Group Annual Report and Accounts 2020
86
B
u
s
i
n
e
s
s
R
e
v
i
e
w
Business review
Financial Summary continued
Income
Interest receivable (1)
Interest payable (1)
Net interest income
Net fees and commissions
Income from trading activities
Other non-interest income
Non interest income
Total income
2020
£m
10,071
(2,322)
7,749
2,012
1,149
(114)
3,047
10,796
2019
£m
11,375
(3,328)
8,047
2,511
1,012
2,683
6,206
14,253
Variance
£m
(1,304)
1,006
(298)
(499)
137
(2,797)
(3,159)
(3,457)
(11.5%)
(30.2%)
(3.7%)
(19.9%)
13.5%
(104.2%)
(50.9%)
(24.3%)
Total income (excluding notable items)
11,180
12,138
(958)
(7.9%)
Notable items within total income
Own credit adjustments (OCA)
Alawwal bank merger gain in NatWest Markets
FX recycling (loss)/gain in Central items & other (2)
Legacy liability release in Central items & other
Loss on redemption of own debt
Liquidity Asset Bond sale gain/(loss)
IFRS volatility in Central items & other (3)
Retail Banking debt sale gain
Metro Bank mortgage portfolio acquisition loss
Vocalink gain on disposal
Commercial Banking fair value and disposal (loss)/gain
NatWest Markets asset disposals/strategic risk reduction (4)
Share of losses under equity accounting for Business Growth Fund
Total
(24)
—
(40)
—
(324)
113
83
8
(58)
—
(37)
(83)
(22)
(384)
(80)
444
1,459
256
—
(16)
9
49
—
45
(16)
(35)
—
2,115
Notes:
(1)
(2) 2019 Includes £290 million arising on the completion of the Alawwal bank merger, £1,102 million arising on the liquidation of RFS Holdings and £67 million in
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
relation to dividends from UBI DAC.
IFRS volatility relates to loans which are economically hedged but for which hedge accounting is not permitted under IFRS.
(3)
(4) Asset disposals/strategic risk reduction in 2020 relates to the cost of exiting positions and the impact of risk reduction transactions entered into, in respect of the
strategic announcement on 14 February 2020. Prior period comparatives refer to the previously disclosed NatWest Markets legacy business disposal losses.
2020 compared with 2019
Total income decreased by £3,457 million, or 24.3%. Excluding
notable items, income decreased by £958 million, or 7.9%, due to
reductions across the retail and commercial businesses, partially
offset by higher NatWest Markets income reflecting increased
customer activity as the market reacted to the spread of the
COVID-19 virus.
Income across the retail and commercial businesses, excluding
notable items, decreased by 10.0% reflecting the lower yield
curve, mortgage margin dilution, subdued business activity and
lower consumer spending. Increased lending, whilst maintaining a
disciplined approach to risk, has partially offset, with gross new
mortgage lending of £31.5 billion in Retail Banking and
drawdowns against UK Government lending schemes in
Commercial Banking.
Bank net interest margin (NIM) of 1.71% was 28 basis points lower
than 2019, principally reflecting the impact of the falling yield curve
and mortgage margin dilution, although this partly receded in the
latter part of the year.
Structural hedges of £159 billion generated £1.1 billion of
incremental net interest income for the year, compared with £0.6
billion of incremental net interest income on a balance of £159
billion in 2019.
NatWest Group Annual Report and Accounts 2020
87
Business review
Financial summary continued
Operating expenses
Staff expenses
Premises and equipment
Other administrative expenses
Strategic costs
Litigation and conduct costs
Depreciation and amortisation
Write down of goodwill and intangibles
Operating expenses
2020
£m
3,461
990
1,535
1,013
113
791
2
7,905
2019
£m
3,567
1,020
1,638
1,381
895
824
—
9,325
Variance
£m
(106)
(30)
(103)
(368)
(782)
(33)
2
(1,420)
(3.0%)
(2.9%)
(6.3%)
(26.6%)
(87.4%)
(4.0%)
nm
(15.2%)
B
u
s
i
n
e
s
s
R
e
v
i
e
w
2020 compared with 2019
Operating expenses excluding litigation and conduct costs,
strategic costs and operating lease depreciation, decreased by
£277 million, or 4.0%, reflecting the continued transition from
physical to digital, the optimisation of our property footprint, lower
investment spend and reductions in NatWest Markets in line with
the strategic announcement in February 2020. Headcount reduced
by c.4,100, or 6.4%.
Strategic costs of £1,013 million included £256 million related to
property charges, £173 million redundancy costs and a £154
million charge related to technology spend.
Litigation and conduct costs of £113 million represent £473 million
of additional charges offset by various releases as programmes
conclude, including a £277 million PPI release, with final
agreement reached on 18 February 2021 with the Official Receiver
in relation to a portfolio of historical PPI claims. The additional
charges mainly represent increased cost of review and execution of
Other Customer Redress as well as Litigation provisions.
Impairments
Loans - amortised cost and FVOCI
ECL provisions
ECL provisions coverage ratio (%)
Impairment losses
ECL charge
ECL loss rate - annualised (basis points)
Amounts written off
2020
£m
372,399
6,186
1.66
3,242
87
937
2019*
£m
336,833
3,792
1.13
696
20
792
Variance
£m
35,566
2,394
0.53
2,546
67
145
11%
63%
47%
nm
nm
18%
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
Note:
(1) The table above summarises loans and related credit impairment measured on an IFRS 9 basis. Refer to Credit Risk - Banking activities in the Risk and capital
management section for further details.
2020 compared with 2019
The net impairment loss of £3,242 million increased by £2,546 million compared with 2019, predominantly driven by stage one and two
charges which reflected the expected deterioration in the economic environment. Stage three impairment losses were £616 million as
government support measures mitigated defaults across lending portfolios and associated ECL stage migration. Total impairment provisions
increased by £2.4 billion to £6.2 billion, mainly reflecting expected credit losses on non-defaulted portfolios, and the ECL coverage ratio
increased from 1.13% to 1.66%.
Tax
Tax charge
UK corporation tax rate
Effective tax rate
2020
£m
83
19.0%
(23.7%)
2019
£m
432
19.0%
10.2%
2020 compared with 2019
A tax charge of £83 million for the year ended 31 December 2020 arises rather than the expected tax credit of £67 million based on the UK
statutory tax rate of 19%. The higher tax charge reflects a reduction in the carrying value of the Group's deferred tax asset in respect of Irish
tax losses, UK banking surcharge, and other non-deductible items such as UK bank levy. These factors have been partially offset by the
impact on the Group's UK net deferred tax asset of the increased tax rate from 1 April 2020, enacted by the Finance Act 2020. Further
details can be found in Note 7 to the consolidated financial statements.
NatWest Group Annual Report and Accounts 2020
88
Business review
Financial summary continued
Summary consolidated balance sheet as at 31 December 2020
Assets
Cash and balances at central banks*
Trading assets
Derivatives
Settlement balances
Loans to banks - amortised cost*
Loans to customers - amortised cost
Other financial assets
Other assets
Total assets
Liabilities
Bank deposits
Customer deposits
Settlement balances
Trading liabilities
Derivatives
Other financial liabilities
Subordinated liabilities
Notes in circulation
Other liabilities
Total liabilities
Total equity
Total liabilities and equity
2020
£m
2019
£m
Variance
£m
124,489
68,990
166,523
2,297
6,955
360,544
55,148
14,545
799,491
20,606
431,739
5,545
72,256
160,705
45,811
9,962
2,655
6,388
755,667
80,993
76,745
150,029
4,387
7,554
326,947
61,452
14,932
723,039
20,493
369,247
4,069
73,949
146,879
45,220
9,979
2,109
7,538
679,483
43,496
(7,755)
16,494
(2,090)
(599)
33,597
(6,304)
(387)
76,452
113
62,492
1,476
(1,693)
13,826
591
(17)
546
(1,150)
76,184
43,824
43,556
268
799,491
723,039
76,452
Tangible net asset value per ordinary share (pence) (1)
261p
268p
(7)p
B
u
s
i
n
e
s
s
R
e
v
i
e
w
54%
(10%)
11%
(48%)
(8%)
10%
(10%)
(3%)
11%
1%
17%
36%
(2%)
9%
1%
(0%)
26%
(15%)
11%
1%
11%
(3%)
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
Note:
(1) Tangible net asset value per ordinary share represents tangible equity divided by the number of ordinary shares in issue.
Total assets of £799.5 billion as at 31 December 2020 increased
by £76.5 billion, 11%, compared with 31 December 2019. This
was primarily driven by increases in cash and balances at central
banks, loans to customers and derivatives, partially offset by
reductions in trading assets, settlement balances and other
financial assets.
Customer deposits increased by £62.5 billion, 17%, to £431.7
billion including increases of £21.5 billion in Retail Banking, £32.7
billion in Commercial Banking and £3.8 billion in Private Banking
as customers retained liquidity in light of economic uncertainty,
combined with the impact of government and central bank actions
in response to COVID-19 schemes.
Cash and balances at central banks increased by £43.5 billion,
Other financial liabilities, which includes customer deposits at fair
value through profit and loss and debt securities in issue,
increased by £0.6 billion, 1%, to £45.8 billion.
Subordinated liabilities have remained at £9.9 billion. Reflecting
new issuances of £1.6 billion and a reclassification from equity of
£1.6 billion, offset by redemptions of £3.1 billion.
Other liabilities decreased by £1.2 billion, 15%, to £6.4 billion
mainly due to reductions in provisions and accruals in the year.
Owners’ equity increased by £0.3 billion, 1%, to £43.8 billion,
driven by a net increase in paid-in equity, partially offset by the
loss for the year, paid-in equity dividends paid and redemption
and reclassification of paid-in equity.
54%, to £124.5 billion mainly as a result of a net customer funding
surplus driven by significant deposit inflows from March 2020 due
to the impact of the COVID-19 pandemic.
Trading assets decreased by £7.8 billion, 10%, to £69.0 billion
mainly driven by reductions in reverse repos and cash collateral.
Trading liabilities decreased by £1.7 billion, 2%, to £72.3 billion
due to reductions in repos.
Derivative assets were up £16.5 billion, 11%, to £166.5 billion,
and liabilities, increased by £13.8 billion, 9% to £160.7 billion.
These movements were driven by an increase in underlying
volumes, together with an increase in mark-to-market driven by a
downward shift in interest rate yields and FX rate fluctuation
across major currencies in the year.
Loans to customers - amortised cost, increased by £33.6 billion,
10%, to £360.5 billion including £13.4 billion in Retail Banking, as
a result of strong new gross mortgage lending and retention, £7.0
billion in Commercial Banking as £12.6 billion drawdowns against
UK Government lending schemes were partially offset by lower
specialised business lending and increased loan provisions and
£12.5 billion in Treasury as part of liquidity management.
Other financial assets include debt securities, equity shares and
other loans, decreased by £6.3 billion, 10%, to £55.1 billion,
primarily driven by reductions in debt securities.
NatWest Group Annual Report and Accounts 2020
89
Business review
Segment performance
Retail Banking
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment losses
Operating profit
Performance ratios
Return on equity (1)
Net interest margin
Cost:income ratio
2020
£m
3,868
313
4,181
(2,295)
(226)
(19)
(2,540)
(792)
849
2019
£m
4,130
736
4,866
(2,403)
(290)
(925)
(3,618)
(393)
855
Variance
£m
(262)
(423)
(685)
108
64
906
1,078
(399)
(6)
(6%)
(57%)
(14%)
(4%)
(22%)
(98%)
(30%)
102%
(1%)
10.2%
2.13%
60.8%
9.6%
2.47%
74.4%
0.6%
(0.34%)
(13.6%)
B
u
s
i
n
e
s
s
R
e
v
i
e
w
Note:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 14.5% (15%
prior to Q1 2020) of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming 28% tax rate.
Capital and balance sheet
Loans to customers (amortised cost)
- personal advances
- mortgages
- cards
Total loans to customers (amortised cost)
Loan impairment provisions
Net loans to customers (amortised cost)
Total assets
Customer deposits
Risk-weighted assets
2020
£bn
7.3
163.0
3.8
174.1
(1.8)
172.3
197.6
171.8
36.7
2019
£bn
8.5
147.5
4.3
160.3
(1.4)
158.9
182.3
150.3
37.8
Variance
£bn
(1.2)
15.5
(0.5)
13.8
(0.4)
13.4
15.3
21.5
(1.1)
(14%)
11%
(12%)
9%
29%
8%
8%
14%
(3%)
Note:
(1) Comparisons with prior periods are impacted by the transfer of the Private Client Advice business to Private Banking from 1 January 2020. The net impact on
full year 2019 operating profit would have been to decrease total income by £44 million and other expenses by £8 million. The net impact on the Q4 2019
balance sheet would have been to decrease customer deposits by £0.2 billion.
2020 compared with 2019
Throughout 2020 Retail Banking helped approximately 258,000
customers with a mortgage repayment holiday and as at 31
December 2020 had 16,000 active mortgage repayment holidays,
representing 1% of the book by volume. Additionally,
approximately 17,000, or 2% of Retail Banking personal loan
customers were active on repayment holidays as at Q4 2020.
NatWest Group acquired a £3.0 billion prime UK mortgage
portfolio from Metro Bank plc on 18 December 2020. The impact
on full year 2020 operating profit was a £58 million loss on
acquisition, a £2 million increase in net interest income and a £9
million increase in impairment losses. The impact on the Q4 2020
balance sheet was to increase net loans to customers by £3.0
billion and RWAs by £1.2 billion. The portfolio will be earnings
accretive within two years.
Total income was £685 million, or 14.1%, lower as regulatory
changes and COVID-19 support measures impacted fee income,
combined with lower deposit returns and unsecured balances,
partially offset by strong balance growth in mortgages and
customer deposits.
Net interest margin decreased by 34 basis points reflecting the
impact of the lower yield curve on deposit returns, lower
unsecured balances and mortgage margin pressure, as front book
margins were lower than back book margins.
Other expenses decreased by £108 million, or 4.5%, reflecting a
significant reduction in headcount, enabled by digital
transformation benefits and increased digital adoption, lower fraud
costs and COVID-19 slowing down investment spend. Litigation
and conduct costs were £19 million.
Impairment losses of £792 million largely reflect significant Stage
two ECL uplifts taken in H1 2020 for expected future economic
deterioration.
Net loans to customers increased by £13.4 billion, or 8.4%, as a
result of strong gross new mortgage lending and retention. Gross
new mortgage lending was £31.5 billion with flow share of 13%,
supporting a stock share of 10.9%, up from 10.2% at Q4 2019.
Personal advances and cards reduced by £1.2 billion and £0.5
billion respectively reflecting lower spend and higher repayments
due to COVID-19 restrictions.
Customer deposits increased by £21.5 billion, or 14.3%, as UK
Government backed initiatives for COVID-19, combined with
restrictions, resulted in lower customer spend and increased
savings.
RWAs decreased by £1.1 billion, or 2.9%, supported by lower
personal unsecured balances.
NatWest Group Annual Report and Accounts 2020
90
Business review
Segment performance continued
Ulster Bank RoI
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment (losses)/releases
Operating (loss)/profit
Average exchange rate - €/£
Performance ratios
Return on equity (1) (2)
Net interest margin (2)
Cost:income ratio (2)
2020
€m
444
130
574
(512)
(28)
(8)
(548)
(281)
(255)
2019
€m
456
191
647
(537)
(68)
(25)
(630)
38
55
Variance
€m
(12)
(61)
(73)
25
40
17
82
(319)
(310)
(3%)
(32%)
(11%)
(5%)
(59%)
(68%)
(13%)
(839%)
(564%)
2020
£m
395
115
510
(454)
(25)
(7)
(486)
(250)
(226)
2019
£m
400
167
567
(470)
(60)
(22)
(552)
34
49
Variance
£m
(5)
(52)
(57)
16
35
15
66
(284)
(275)
(1%)
(31%)
(10%)
(3%)
(58%)
(68%)
(12%)
(835%)
(561%)
1.125
1.141
(11.7%)
1.50%
95.5%
2.3%
1.59%
97.4%
(14.0%)
(0.09%)
(1.9%)
(11.7%)
1.50%
95.3%
2.3%
1.59%
97.4%
(14.0%)
(0.09%)
(2.1%)
B
u
s
i
n
e
s
s
R
e
v
i
e
w
Notes:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference share dividends divided by average notional equity based on 15.5%
(15% prior to Q1 2020) of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming a nil tax rate.
(2) Ratios have been presented on a Euro basis. Euro comparatives have been restated.
Capital and balance sheet
Loans to customers (amortised cost)
- mortgages
- other lending
Total loans to customers (amortised cost)
Loan impairment provisions
Net loans to customers (amortised cost)
Total assets
Funded assets
Customer deposits
Risk-weighted assets
Spot exchange rate - €/£
2020 compared with 2019
2020
€bn
15.2
5.7
20.9
(0.9)
20.0
29.6
29.6
21.8
13.2
2019
€bn
16.0
6.3
22.3
(0.9)
21.4
29.8
29.8
21.7
15.3
Variance
€bn
(0.8)
(0.6)
(1.4)
—
(1.4)
(0.2)
(0.2)
0.1
(2.1)
(5%)
(10%)
(6%)
—
(7%)
(1%)
(1%)
0%
(14%)
2020
£bn
13.7
5.1
18.8
(0.8)
18.0
26.6
26.6
19.6
11.8
2019
£bn
13.6
5.4
19.0
(0.8)
18.2
25.4
25.4
18.5
13.0
Variance
£bn
0.1
(0.3)
(0.2)
—
(0.2)
1.2
1.2
1.1
(1.2)
1%
(6%)
(1%)
—
(1%)
5%
5%
6%
(9%)
1.113
1.175
Impairment losses of €281 million reflect the charges taken in the
first half of 2020 which were significantly impacted by the
uncertain economic environment created by the COVID-19
pandemic.
Net loans to customers decreased by €1.4 billion, or 6.5%, as
repayments exceeded gross new lending of €2.1 billion, combined
with a €0.3 billion de-recognition of non-performing loans (NPLs)
from a sale agreed in Q4 2019, and increased loan provisions.
Customer deposits increased by €0.1 billion, or 0.5%, due to a
large one-off placement at the end of the year, partially offset by
earlier reductions in commercial balances due to pricing changes,
including the implementation of negative rates on large and mid-
sized corporate customers and non-bank financial institutions.
RWAs decreased by €2.1 billion, or 13.7%, reflecting the impact
of NPL de-recognitions and lower lending volumes.
Following an extensive review and despite the progress that has
been made, it has become clear Ulster Bank will not be able to
generate sustainable long term returns for our shareholders. As
a result, we are to begin a phased withdrawal from the Republic
of Ireland over the coming years which will be undertaken with
careful consideration of the impact on customers and our
colleagues.
Throughout the difficulties and uncertainties of 2020, Ulster Bank
RoI has continued to support its customers through COVID-19 by
keeping its branches, cash and call centres open throughout and
by making significant improvements to its digital platforms. During
2020 almost 18,000 payment breaks were provided, with 82%
returning to payment arrangements as at 31 December 2020.
Additionally, Ulster Bank RoI continued to support its commercial
customers by providing them assistance with the Future Growth
Loan and Credit Guarantee schemes initiated by the Irish
government.
Total income decreased by €73 million, or 11.3%, reflecting lower
lending volumes and fee income due to the impact of COVID-19,
lower FX gains, lower hedging income and a one-off swap
breakage benefit in 2019.
Net Interest margin decreased by 9 basis points due to the impact
of negative rates on increased liquid assets.
Other expenses decreased by €25 million, or 4.7%, reflecting a
6.9% headcount reduction following the scale-down of functional
teams and lower marketing, back office and project costs, partially
offset by higher pension costs due to a one-off credit in 2019.
NatWest Group Annual Report and Accounts 2020
91
Business review
Segment performance continued
Commercial Banking
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment losses
Operating (loss)/profit
Performance ratios
Return on equity (1)
Net interest margin
Cost:income ratio
2020
£m
2,740
1,218
3,958
(2,261)
(179)
10
(2,430)
(1,927)
(399)
2019
£m
2,842
1,476
4,318
(2,236)
(302)
(62)
(2,600)
(391)
1,327
Variance
£m
(102)
(258)
(360)
(25)
123
72
170
(1,536)
(1,726)
(4%)
(17%)
(8%)
1%
(41%)
(116%)
(7%)
393%
(130%)
(4.5%)
1.68%
59.9%
8.4%
1.95%
58.9%
(12.9%)
(0.27%)
1.0%
B
u
s
i
n
e
s
s
R
e
v
i
e
w
Note:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 11.5% (12%
prior to Q1 2020) of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming 28% tax rate.
Capital and balance sheet
Loans to customers (amortised cost)
- business banking
- SME & mid-corporates
- specialised business
- large corporates & institutions (1)
- real estate (2)
- commercial - EU divestment
- other (3)
Total loans to customers (amortised cost)
Loan impairment provisions
Net loans to customers (amortised cost)
Total assets
Customer deposits (excluding repos)
Loan:deposit ratio (excluding repos)
Risk-weighted assets
2020
£bn
13.5
32.4
14.8
21.4
21.5
5.9
1.6
111.1
(2.9)
108.2
187.4
167.7
65%
75.1
2019
£bn
6.9
29.7
16.1
21.0
21.3
5.6
1.9
102.5
(1.3)
101.2
165.4
135.0
75%
72.5
Variance
£bn
6.6
2.7
(1.3)
0.4
0.2
0.3
(0.3)
8.6
(1.6)
7.0
22.0
32.7
(10%)
2.6
96%
9%
(8%)
2%
1%
5%
(16%)
8%
123%
7%
13%
24%
(13%)
4%
Notes:
(1) Segment reporting for loans to customers for Large Corporates & Institutions (LC&I) includes the Western European business segment.
(2) Real estate includes commercial real estate and housing associations.
(3) Other includes shipping and project finance.
2020 compared with 2019
Commercial Banking continues to support customers through a
comprehensive package of initiatives including participation in the
UK Government’s financial support schemes. During 2020, £8.6
billion BBLS, £3.9 billion CBILS and £1.3 billion CLBILS had been
approved. Since 22 March 2020 Commercial Banking provided
payment holidays on over 74,000 customer accounts and as at 31
December 2020 had active payment holidays on c.11,000
customer accounts, representing 4% of the lending book by value.
Total income decreased by £360 million, or 8.3%, reflecting lower
deposit returns and subdued transactional business activity,
combined with a £21 million increase in fair value and disposal
losses, primarily through risk mitigation actions.
Net interest margin decreased by 27 basis points reflecting the
impact of the lower yield curve on deposit returns and increased
liquidity portfolio costs from higher deposit volumes, partially offset
by deposit repricing.
Other expenses, excluding OLD, increased by £18 million, or 0.9%,
as £80 million higher back office operations costs, increased
innovation spend and £19 million lower VAT recoveries were
partially offset by a headcount reduction of 1.0% following
operating model efficiencies in the second half of 2019 and COVID-
19 slowing down investment spend.
Impairment losses of £1,927 million primarily reflect the
deterioration of the economic outlook as a result of the COVID-19
pandemic driving significant stage two charges, with total stage
three charges of £318 million, including a small number of single
name charges.
Net loans to customers increased by £7.0 billion, or 6.9%, as £12.6
billion drawdowns against UK Government lending schemes were
partially offset by lower specialised business lending and increased
loan provisions. Revolving credit facility (RCF) utilisation decreased
to c.22% of committed facilities, below Q4 2019 pre-COVID-19
levels of c.27% and significantly lower than the peak of c.40% in
April 2020.
Customer deposits increased by £32.7 billion, or 24.2%, as
customers built and retained liquidity in light of economic
uncertainty combined with the impact of government and central
bank actions in light of COVID-19.
RWAs increased by £2.6 billion, or 3.6%, reflecting volume growth
and £2.4 billion higher risk parameters, partially offset by a £0.8
billion reduction related to active capital management and a c.£1.5
billion reduction reflecting the CRR COVID-19 amendment to
accelerate the planned changes to the SME supporting factor and
the introduction of an Infrastructure supporting factor.
NatWest Group Annual Report and Accounts 2020
92
Business review
Segment performance continued
Private Banking – commentary adjusted for transfers
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment (losses)/releases
Operating (loss)/profit
Performance ratios
Return on equity (1)
Net interest margin
Cost:income ratio
Capital and balance sheet
Loans to customers (amortised cost)
- personal
- mortgages
- other
Total loans to customers (amortised cost)
Loan impairment provisions
Net loans to customers (amortised cost)
Total assets
Assets under management (AUMs) (2)
Assets under administration (AUAs) (3)
Assets under management and administration (AUMA)
Customer deposits
Loan:deposit ratio
Risk-weighted assets
B
u
s
i
n
e
s
s
R
e
v
i
e
w
2020
£m
489
274
763
(466)
(15)
26
(455)
(100)
208
2019
£m
521
256
777
(439)
(38)
(9)
(486)
6
297
Variance
£bn
(32)
18
(14)
(27)
23
35
31
(106)
(89)
(6%)
7%
(2%)
6%
(61%)
(389%)
(6%)
(1,767%)
(30%)
10.3%
2.05%
59.6%
15.4%
2.40%
62.5%
(5.1%)
(0.35%)
(2.9%)
2020
£bn
2.2
10.7
4.2
17.1
(0.1)
17.0
26.2
29.1
3.0
32.1
32.4
52%
10.9
2019
£bn
2.1
10.0
3.4
15.5
—
15.5
23.3
23.2
7.2
30.4
28.4
55%
10.1
Variance
£bn
0.1
0.7
0.8
1.6
(0.1)
1.5
2.9
5.9
(4.2)
1.7
4.0
(3%)
0.8
5%
7%
24%
10%
—
10%
12%
25%
(58%)
6%
14%
(5%)
8%
Notes:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 12.5% (13.0%
prior to Q1 2020 and 13.5% prior to Q1 2019) of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes),
assuming 28% tax rate.
(2) Comprises assets under management, assets under custody and investment cash.
(3) Private Banking manages assets under administration portfolios on behalf of Retail Banking and RBSI and receives a management fee for providing this
service.
(4) Comparisons with prior periods are impacted by the transfer of the Private Client Advice business from Retail Banking from 1 January 2020. The net impact on
full year 2019 operating profit would have been to increase total income by £44 million and other expenses by £8 million. The net impact on the Q4 2019
balance sheet would have been to increase customer deposits by £0.2 billion. AUMs would have been £4.6 billion higher, with a corresponding decrease in
AUAs. Variances in the commentary below have been adjusted for the impact of this transfer.
2020 compared with 2019
Private Banking remains committed to supporting clients through a
range of initiatives, including the provision of mortgage and
personal loan repayment deferrals in appropriate circumstances
and via participation in the UK Government’s financial support
schemes. During 2020, £58 million BBLS, £237 million CBILS and
£44 million CLBILS had been approved.
Total income decreased by £58 million, or 7.1%, primarily reflecting
lower deposit funding benefits and a reduction in fee income
partially offset by balance sheet growth.
Net Interest margin decreased by 35 basis points reflecting lower
deposit funding benefits and higher liquidity portfolio costs.
Other expenses increased by £19 million, or 4.3%, reflecting higher
investment spend focused on enhancing the client proposition and
a number of one-off items partially offset by lower back office
operations costs.
Impairment losses of £100 million primarily reflect stage one and
two charges due to the deterioration of the economic outlook, with
total stage three charges of £15 million.
Net loans to customers increased by £1.5 billion, or 9.7%,
supported by £0.7 billion of mortgage lending growth and £0.3
billion drawdowns against UK Government lending schemes.
RWAs increased by £0.8 billion, or 7.9%, primarily reflecting
increased lending volumes.
Customer deposits increased by £3.8 billion, or 13.3%, reflecting
£2.3 billion of commercial inflows and £1.5 billion of personal
inflows.
AUMAs increased by £1.7 billion, or 5.6%, reflecting positive
investment performance of £0.9 billion and net new money inflows
of £0.8 billion, which were impacted by EEA resident client outflows
following the UK’s exit from the EU.
NatWest Group Annual Report and Accounts 2020
93
Business review
Segment performance continued
RBS International
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment losses
Operating profit/(loss)
Performance ratios
Return on equity (1)
Net interest margin
Cost:income ratio
2020
£m
371
126
497
(244)
(49)
2
(291)
(107)
99
2019
£m
478
132
610
(244)
(20)
—
(264)
(2)
344
Variance
£m
(107)
(6)
(113)
—
(29)
2
(27)
(105)
(245)
(22%)
(5%)
(19%)
—
145%
—
10%
5,250%
(71%)
6.1%
1.17%
58.6%
25.7%
1.60%
43.3%
(19.6%)
(0.43%)
15.3%
B
u
s
i
n
e
s
s
R
e
v
i
e
w
Note:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based
on 16% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes).
Capital and balance sheet
Loans to customers (amortised cost)
- corporate
- mortgages
- other
Total loans to customers (amortised cost)
Loan impairment provisions
Net loans to customers (amortised cost)
Total assets
Customer deposits
Risk-weighted assets
2020
£bn
10.4
2.5
0.5
13.4
(0.1)
13.3
34.0
31.3
7.5
2019
£bn
11.1
2.6
0.4
14.1
—
14.1
31.7
30.1
6.5
Variance
£bn
(0.7)
(0.1)
0.1
(0.7)
(0.1)
(0.8)
2.3
1.2
1.0
(6%)
(4%)
25%
(5%)
—
(6%)
7%
4%
15%
2020 compared with 2019
As at 31 December 2020, RBS International has supported 1,240
mortgage repayment breaks, reflecting a mortgage value of £268
million, and has provided financial support for 622 business
customers with working capital facilities, reflecting a value of £588
million, while continuing to suspend a range of fees and charges for
its personal and business customers.
Total income decreased by £113 million, or 18.5%, primarily due to
the impact of the interest rate reductions on deposit income and
lower fee income reflecting the economic response to COVID-19.
Net Interest margin decreased by 43 basis points due to lower
deposit funding benefits as a result of central bank interest rate
reductions.
Other expenses were stable as front office non-staff cost reduction
actions and a 5.6% headcount reduction were offset by a higher
bank levy charge.
Impairment losses of £107 million primarily reflect a more uncertain
economic environment and refreshed staging and maturity date
analysis.
Net loans to customers decreased by £0.8 billion, or 5.7%, as
customers repaid facilities to position themselves in the uncertain
environment, partially offset by increased investment activity in the
latter part of 2020.
Customer deposits increased by £1.2 billion, or 3.8%, due to short
term placement inflows across both Institutional and Local Banking.
RWAs increased by £1.0 billion, or 15.4%, due to customer
maturities and higher lending facilities in the wholesale sector.
NatWest Group Annual Report and Accounts 2020
94
Business review
Segment performance continued
NatWest Markets(1)
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment (losses)/releases
Operating (loss)
Analysis of income by product
Fixed income
Currencies
Capital Markets
Capital Management Unit
Revenue share paid to other segments
Income excluding asset disposals/strategic risk reduction and own credit adjustments
Asset disposals/strategic risk reduction (2)
Own credit adjustments
Total income
Performance ratios
Return on equity (3)
Cost:income ratio
Capital and balance sheet
Net loans to customers (amortised cost)
Total assets
Funded assets
Risk-weighted assets
2020
£m
(57)
1,180
1,123
(1,038)
(267)
(5)
(1,310)
(40)
(227)
518
583
384
(62)
(193)
1,230
(83)
(24)
1,123
2019
£m
(188)
1,530
1,342
(1,178)
(222)
(18)
(1,418)
51
(25)
496
432
362
340
(208)
1,422
—
(80)
1,342
Variance
£m
131
(350)
(219)
140
(45)
13
108
(91)
(202)
22
151
22
(402)
15
(192)
(83)
56
(219)
(70%)
(23%)
(16%)
(12%)
20%
(72%)
(8%)
(178%)
808%
4%
35%
6%
(118%)
(7%)
(14%)
—
(70%)
(16%)
B
u
s
i
n
e
s
s
R
e
v
i
e
w
(3.8)%
116.7%
(3.2)%
105.7%
(0.6)%
11.0%
2020
£bn
8.4
270.1
105.9
26.9
2019
£bn
8.4
263.9
116.2
37.9
Variance
£bn
—
6.2
(10.3)
(11.0)
—
2%
(9%)
(29%)
Notes:
(1) The NatWest Markets operating segment is not the same as the NatWest Markets Plc legal entity (NWM Plc) or group (NWM or NWM Group). For 2019, NWM
Group includes NatWest Markets N.V. (NWM N.V.) from 29 November 2019 only. For periods prior to Q4 2019, NWM N.V. was excluded from the NWM Group.
In both 2019 and 2020 the NatWest Markets segment excludes the Central items & other segment.
(2) Asset disposals/strategic risk reduction in 2020 relates to the cost of exiting positions and the impact of risk reduction transactions entered into, in respect of the
strategic announcement on 14 February 2020.
(3) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 15% of the
period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming 28% tax rate.
2020 compared with 2019
NatWest Markets has made significant progress in reshaping the
business for the future and advancing its transformation to deliver
the refocused strategy announced in February 2020. As progress
has been made against the strategy, RWAs have reduced and the
business is ahead of its plan to achieve the medium-term reduction
to £20 billion.
By accelerating its transformation to become a more integrated and
sustainable part of NatWest Group, NatWest Markets has focussed
on what it does best and what matters to NatWest Group’s
customers. The product offering has been simplified and in Q2 2020
NatWest Markets entered an agreement with BNP Paribas to
provide ‘house’ Futures and associated back office services.
NatWest Markets has consolidated certain customer coverage
teams and services and functional teams with their counterparts
from across NatWest Group, enhancing our collaborative approach
to customers.
Total income decreased by £219 million, or 16.3%, reflecting the
£444 million Alawwal bank merger gain in 2019 and an increase in
disposal losses of £48 million partially offset by stronger business
performance in the current year.
Income excluding asset disposals/strategic risk reduction, OCA and
notable items increased by £217 million, or 21.4%, reflecting a
strong performance over the year, particularly in the first half of 2020
as customer activity increased as the market reacted to the spread
of the COVID-19 virus.
Other expenses decreased by £140 million, or 11.9%, reflecting
continued reductions in line with the strategic announcement in
February 2020.
Impairment losses of £40 million reflect the impact of stage two
charges taken in the first half of 2020 compared with a net
impairment release of £51 million in the prior year for a small
number of legacy cases.
RWAs decreased by £11.0 billion, or 29.0%, as market risk and
counterparty credit risk decreased by £3.6 billion and £3.5 billion
respectively and credit risk decreased by £3.4 billion as the business
exceeded its target for RWA reductions over the course of 2020.
NatWest Group Annual Report and Accounts 2020
95
Business review
Segment performance continued
Central items & other
Central items not allocated
2020
£m
(655)
2019
£m
1,385
Variance
£m
(2,040)
(147%)
Funding and operating costs have been allocated to operating segments based on direct service usage, the requirement for market funding and
other appropriate drivers where services span more than one segment. Residual unallocated items relate to volatile corporate items that do not
naturally reside within a segment.
2020 compared with 2019
Central items not allocated represented a £655 million operating loss in 2020 principally reflecting the day one loss on redemption of own
debt of £324 million related to the repurchase of legacy instruments, property related strategic costs, litigation and conduct charges and
other treasury income. 2019 included £1,459 million of FX recycling gains, a £169 million reimbursement under indemnification agreements
relating to US residential mortgage-backed securities (RMBS) and strategic costs of £449 million, which were mainly property related.
B
u
s
i
n
e
s
s
R
e
v
i
e
w
NatWest Group Annual Report and Accounts 2020
96
Our Board
1
N
7
2
8
3
9
4
5
6
Re T
10
A
Ri
T
N
Ri
A
N
11
12
Re
A
Ri
N
T
S
S Re
A
N
Re
S
Ri Re
Key
A
N
Re
Underlined
Group Audit Committee
Group Nominations and Governance Committee
Group Performance and Remuneration Committee
Committee Chairman
Ri
S
T
Group Board Risk Committee
Group Sustainable Banking Committee
Technology and Innovation Committee
N
1 Howard Davies
Appointed: 14 July 2015 (Board),
1 September 2015 (Chairman)
Experience: Howard was a non-executive
director of Prudential plc from 2010 to 2020;
Chair of the UK Airports Commission
between 2012 and 2015; Chairman of
Phoenix plc from 2012 to 2015; Director of
the London School of Economics and
Political Science from 2003 until May 2011;
Chairman of the UK Financial Services
Authority from 1997 to 2003; and Deputy
Governor of the Bank of England from 1995
to 1997.
He is also Professor of Practice at the Paris
Institute of Political Science (Sciences Po)
and author of several books on financial
subjects.
External appointments: Member of the
Regulatory and Compliance Advisory Board
of Millennium Management LLC; Chair of the
International Advisory Council of the China
Securities Regulatory Commission; Member
of the International Advisory Council
of the China Banking and Insurance
Regulatory Commission; and Chairman of
Inigo Limited.
2 Alison Rose
Appointed: 1 November 2019
Experience: Alison has worked at NatWest
Group for 27 years. Prior to her current role,
Alison was Deputy CEO of NatWest Holdings
and CEO of the Commercial and Private
Banking business. She has held a number of
senior roles across NatWest Group including
Head of Europe, Middle East and Africa,
Markets & International Banking, Global
Head of International Banking Capital and
Balance Sheet and Head of Leveraged
Finance.
Alison was invited by the UK Government to
lead a review of the barriers to women
starting a business and launched The Rose
Review in March 2019. Alison also
champions NatWest’s Entrepreneur
Accelerator programme, an innovative
initiative supporting start-up businesses
across the UK, and sponsors the bank’s
employee-led networks.
External appointments: Alison sits on the
board of directors for the Institute of
International Finance and is a member of the
International Business Council for the World
Economic Forum. Alison is a non-executive
director of Great Portland Estates plc and
sits on the board of the Coutts Charitable
Foundation.
Executive Officer of France Telecom. Prior to
that he was Chairman of SG Warburg France
and Managing Director of SG Warburg.
Frank is a graduate of HEC and IEP in Paris
and of Harvard Law School in the US.
External appointments: Chairman of
NortonLifeLock Inc; non-executive director of
Arqiva Group Limited; and non-executive
director of IHS Towers.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
3 Katie Murray
Appointed: 1 January 2019
Experience: Katie joined NatWest Group as
Director of Finance in November 2015 and
was appointed as Deputy Chief Financial
Officer in March 2017. She was appointed as
Chief Financial Officer in January 2019.
Katie has worked in Finance and Accounting
for nearly 30 years with experience in capital
management, investor relations, financial
planning and all areas of financial services.
Katie was previously the Group Finance
Director for Old Mutual Emerging Markets,
based in Johannesburg from 2011 to 2015,
having held various roles across Old Mutual
from 2002. Prior to this Katie worked at
KPMG for 13 years.
Katie is a Chartered Accountant having
trained in Scotland and is a member of the
Institute of Chartered Accountants in
Scotland.
External appointments: None.
Independent non-executive directors
Re
T
4 Frank Dangeard
Appointed: 16 May 2016
Experience: Frank assumed the role of
Chairman, NatWest Markets Plc on 30 April
2018. Previously, Frank served as a non-
executive director of Crédit Agricole CIB,
EDF, Home Credit, Orange, Sonaecom
SGPS, and as Deputy Chairman and acting
Chairman of Telenor ASA. During his
executive career he held various roles at
Thomson S.A., including Chairman and Chief
Executive Officer, and was Deputy Chief
A Ri
T
N
5 Patrick Flynn
Appointed: 1 June 2018
Experience: Previously, Patrick was the
Chief Financial Officer and a member of the
Executive Board of ING Group from April
2009 to May 2017, and prior to that, he
worked for HSBC for 20 years. Patrick is a
Fellow of Chartered Accountants Ireland.
External appointments: Senior independent
director of Aviva plc and member of the
Remuneration, Risk and Nominations
Committees and Chair of the Audit
Committee.
Ri
A
N
6 Morten Friis
Appointed: 10 April 2014
Experience: Prior to being appointed to the
Board, Morten had a 34 year financial
services career. He held various roles at
Royal Bank of Canada and its subsidiaries
including Associate Director at Orion Royal
Bank; Vice President, Business Banking; and
Vice President, Financial Institutions. In
1997, he was appointed as Senior Vice
President, Group Risk Management and
served as the Chief Credit Officer, then Chief
Risk Officer, from 2004 to 2014. He was also
previously a Director of RBC Bank (USA);
Westbury Life Insurance Company; RBC Life
Insurance Company; and RBC Dexia
Investor Services Trust Company.
External appointments: Member of the board
of directors of the Harvard Business School
Club of Toronto; and non-executive director
of Jackson National Life Insurance
Company.
NatWest Group Annual Report and Accounts 2020
97
S
T
S
Re
Ri
A G
N
S
T
Our Board
S
Ri Re
11 Lena Wilson, CBE
Appointed: 1 January 2018
Experience: Lena is an experienced CEO
with an international career, who spent a
significant proportion of her executive career
with Scottish Enterprise, latterly as Chief
Executive from 2009 until 2017. Prior to that,
Lena held the role of Senior Investment
Advisor to The World Bank in Washington
DC. She is a visiting Professor at the
University of Strathclyde and has previously
served as a member of Scotland's Financial
Services Advisory Board and as Chair of
Scotland's Energy Jobs Taskforce. In June
2015 she received a CBE for services to
economic development in Scotland. Lena
chairs the Colleague Advisory Panel
established by NatWest Group in 2018.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
External appointments: Non-executive
director of Scottish Power Renewables
Limited, visiting Professor, University of
Strathclyde Business School and Senior
Independent Director and Chair of the
Nominations Committee of Argentex Group
plc. Chair of the Advisory Board of Turtle
Pack Limited and Chair of Chiene + Tait LLP.
Chair and non-executive director of Picton
Property Income Limited.
Chief Governance Officer and Company
Secretary
12 Jan Cargill
Appointed: 5 August 2019
Experience: Jan is a chartered company
secretary with over 20 years corporate
governance experience. She was appointed
Chief Governance Officer and Company
Secretary in 2019, and prior to that held
various roles in the legal and secretariat
functions, including Head of Board and
Shareholder Services.
Jan has a law degree and is a Fellow of the
Chartered Banker Institute. She is also an
Associate of The Chartered Governance
Institute and has an INSEAD Certificate in
Corporate Governance.
Re
A
Ri
N
7 Robert Gillespie
Appointed: 2 December 2013
Experience: Robert had a long career in
investment banking, specialising in corporate
advisory work. He was Director General of
the Takeover Panel from 2010 until 2013 and
prior to that held a number of senior
management positions at UBS including
being global head of investment banking
from 1999 until 2005, Chief Executive of UBS
for EMEA from 2004 to 2006 and Vice
Chairman of UBS Investment Bank from
2005 to 2008. He commenced his career at
Price Waterhouse where he qualified as a
Chartered Accountant and in 1981 joined
S.G. Warburg which subsequently became
part of UBS.
External appointments: Chairman of the Boat
Race Company Limited; non-executive
director of Social Finance Limited; and non-
executive director of Burford Capital Limited
and a member of its Audit Committee.
T
S
8 Yasmin Jetha
Appointed: 1 April 2020
Experience: During her executive career,
Yasmin held Chief Information Officer roles
at Bupa and also the Financial Times, where
she became the Chief Operating Officer. She
previously had a career spanning nearly 20
years at Abbey National PLC, latterly serving
as an executive director on the board. In
addition to being Vice Chair of the Board of
Governors at the University of Bedfordshire
from 2008 to 2011, Yasmin also served for
over ten years, until April 2017, as Vice Chair
of the National Committee of the Aga Khan
Foundation (UK) Ltd, a non-denominational
charity.
Yasmin holds a Master of Science in
Management Science from Imperial College
London and a Bachelor of Science in
Mathematics from the University of London.
She is a Fellow of the Chartered Institute of
Management Accountants, was awarded an
honorary Doctor of Laws degree by the
University of Leicester in 2005 and was
made an honorary Fellow of the University of
Bedfordshire in 2011.
External appointments: Non-executive
director of Guardian Media Group plc and
member of its Remuneration Committee, and
non-executive director of Nation Media
Group Ltd and Chair of its HR and
Remuneration Committee and member of its
Strategy and Investment Committee.
S Re
9 Mike Rogers
Appointed: 26 January 2016
Experience: Mike was previously Chief
Executive of Liverpool Victoria Group for 10
years. Mike has extensive experience in
retail banking and financial services. He
joined Barclays in 1986 where he undertook
a variety of roles in the UK and overseas
across business banking, wealth
management and retail banking and was
Managing Director of Small Business,
Premier Banking and UK Retail Banking.
External appointments: Chairman of
Experian plc and Chairman of Aegon UK plc.
A
N Re
10 Mark Seligman
Appointed: 1 April 2017; Senior Independent
Director since 1 January 2018
Experience: Mark is a former senior
investment banker with broad financial
services knowledge, has substantial FTSE
100 Board experience gained in various
industry sectors, including as a Committee
Chair and Senior Independent Director.
During his executive career, he held various
senior roles at Credit Suisse/BZW (including
Deputy Chairman, CSFB Europe and
Chairman, UK Investment Banking, CSFB);
and previously SG Warburg (ultimately as
Managing Director, Head of Advisory). He
has also previously served as a non-
executive Director of BG Group plc, as
Deputy Chairman of G4S plc and as Senior
Independent Director of Kingfisher plc.
External appointments: Non-executive
director and Chairman of the Audit
Committee of Smiths Group plc.
NatWest Group Annual Report and Accounts 2020
98
UK Corporate Governance Code 2018
All directors are committed to observing high
standards of corporate governance, integrity
and professionalism.
Information on how the company has applied
the Principles and complied with the
Provisions of the UK Corporate Governance
Code 2018 (the Code) can be found in this
Corporate governance report under the
Code’s 5 main section headings. A formal
statement of compliance with the Code can be
found on page 151.
In conclusion I would like to thank my fellow
Board members for their resilience and
dedication throughout what has been an
exceptional year.
Howard Davies
Chairman of the Board
19 February 2021
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Corporate governance
Our Board
Corporate governance
Report of the Group
Nominations and Governance
Committee
Report of the Group Audit
Committee
Report of the Group Board
Risk Committee
Report of the Group
Sustainable Banking
Committee
Report of the Technology and
Innovation Committee
Directors’ remuneration report
Compliance report
Report of the directors
Statement of directors’
responsibilities
Page
97
99
106
107
112
116
118
119
151
153
156
Dear Shareholder,
I am pleased to present the Corporate
governance report for 2020.
2020 has been an extraordinary year. As the
UK entered a national lockdown in March, our
Board transitioned swiftly and smoothly to
frequent virtual meetings. The Group Chief
Executive Officer (Group CEO) and wider
executive management team kept the Board
informed on our pandemic response,
supporting effective Board oversight and
challenge as the organisation pivoted its
operations at pace, focusing on our
customers’ financial health, prioritising
colleague safety and wellbeing, and helping
our local communities.
NatWest Group has made great strides as it
focuses on becoming a purpose-led
organisation. As a Board, we are working hard
to embed our purpose in Board discussions
and decision-making, ensuring different
stakeholder needs are considered. Our
section 172(1) statement on page 48 provides
further information on our approach and
includes case study examples.
Further details on how the Board operated
during 2020, including principal areas of
Board focus, are set out on page 101.
Board and committee changes
We said farewell to two of our longer-serving
directors during 2020. Alison Davis stepped
down on 31 March 2020, and Baroness
Noakes left the Board on 31 July 2020. I
would like to record my thanks to Alison and
Sheila for their immense contribution during
their time with NatWest Group.
On 1 April 2020 Yasmin Jetha re-joined the
Board of NatWest Group plc, having first been
appointed in June 2017. Yasmin stepped
down in April 2018 in order to serve solely as
a director of our key ring-fenced entities, and,
like the majority of our directors, she
continues to serve on these boards in addition
to the Board of NatWest Group plc.
The following Board Committee chair and
membership changes were also made during
2020:-
On 1 April 2020 Yasmin Jetha was
appointed Chair of the Technology and
Innovation Committee and joined the
Group Sustainable Banking Committee.
On 1 August 2020 Morten Friis assumed
the Chair of the Group Board Risk
Committee and joined the Group
Nominations & Governance Committee.
Lena Wilson stepped down as a member
of the Technology and Innovation
Committee on 31 March 2020; and joined
the Group Performance and Remuneration
Committee on 1 April 2020 and the Group
Board Risk Committee on 1 August 2020.
Robert Gillespie stepped down as a
member of the Group Sustainable Banking
Committee on 31 July 2020 and joined the
Group Audit Committee on 1 August 2020.
Board effectiveness
In 2020, the Board and Committee evaluation
was conducted by the Chief Governance
Officer and Company Secretary.
The review concluded that the Board and its
Committees continue to operate effectively
and within their terms of reference.
Further information on the 2020 internal
evaluation can be found on page 104.
NatWest Group Annual Report and Accounts 2020
99
Corporate governance
Board and Committee meetings
The table below shows Board and Committee
membership and directors’ attendance at
scheduled meetings during 2020. There were
six scheduled Board meetings during 2020,
the same number as in 2019.
In addition to scheduled meetings, additional
meetings of the Board and its Committees
were held on an ad hoc basis throughout the
year to receive updates and deal with time-
critical matters. There were 16 additional
Board meetings held in 2020 compared to 6
additional meetings held in 2019. In response
to the COVID-19 pandemic, the Board met
virtually on a weekly basis in the initial stages,
later moving to fortnightly and this accounted
for 10 of the 16 additional meetings held in
2020.
The following number of ad hoc Board
Committee meetings also took place: one
N&G meeting, two GAC meetings, three BRC
meetings, two SBC meetings, one TIC
meeting and eight RemCo meetings. In
accordance with the Code, the Chairman and
the non-executive directors met at least once
without executive directors present.
Board and Committee membership and scheduled meeting attendance in 2020
Howard Davies
Alison Rose
Katie Murray
Frank Dangeard
Patrick Flynn
Morten Friis (1)
Robert Gillespie (2)
Yasmin Jetha (3)
Mike Rogers
Mark Seligman
Lena Wilson (4)
Former Directors
Alison Davis (5)
Baroness Noakes (6)
Group
Nominations
and Governance
Committee
(N&G)
4/4
—
—
—
4/4
2/2
4/4
—
—
4/4
—
Group Audit
Committee
(GAC)
—
—
—
—
5/5
5/5
2/2
—
—
5/5
—
Group Board
Risk Committee
(BRC)
—
—
—
—
8/8
8/8
8/8
—
—
—
3/3
Group
Sustainable
Banking
Committee
(SBC)
—
—
—
—
—
—
2/2
5/5
5/5
—
5/5
Technology
and Innovation
Committee
(TIC)
—
—
—
3/3
3/3
—
—
3/3
—
—
0/0
Group
Performance and
Remuneration
Committee
(RemCo)
—
—
—
7/7
—
—
7/7
—
7/7
7/7
5/5
—
2/2
—
3/3
—
5/5
0/0
—
0/0
—
2/2
—
Board
6/6
6/6
6/6
6/6
6/6
6/6
6/6
5/5
6/6
6/6
6/6
1/1
3/3
Notes:
(1) Morten Friis assumed the role of BRC Chair and was appointed to N&G on 1 August 2020.
(2) Robert Gillespie stepped down from SBC on 31 July 2020 and was appointed to GAC on 1 August 2020.
(3) Yasmin Jetha was appointed to the Board, SBC and TIC and assumed the role of TIC Chair on 1 April 2020.
(4) Lena Wilson stepped down from TIC on 31 March 2020, was appointed to RemCo on 1 April 2020 and appointed to BRC on 1 August 2020.
(5) Alison Davis resigned from the Board on 31 March 2020.
(6) Baroness Noakes resigned from the Board on 31 July 2020.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
100
An integral part of NatWest Group’s
governance arrangements is the appointment
of three Double Independent Non-Executive
Directors (DINEDs) to the boards, and board
committees, of the NWH Sub Group.
The DINEDs are independent in two respects:
(i) independent of management as non-
executives; and
(ii) independent of the rest of NatWest Group
by virtue of their NWH Sub Group-only
directorships.
The DINEDs play a critical role in NatWest
Group’s ring-fencing governance structure,
and are responsible for exercising appropriate
oversight of the independence and
effectiveness of the NWH Sub Group’s
governance arrangements, including the
ability of each board to take decisions
independently.
The DINEDs attend NatWest Group plc Board
meetings in an observer capacity.
The governance arrangements for the boards
and board committees of NatWest Group plc
and the NWH Sub Group have been designed
to enable NatWest Group plc to exercise
appropriate oversight and to ensure that, as
far as is reasonably practicable, the NWH Sub
Group is able to take decisions independently
of the wider Group.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Markets supports NatWest Group’s
corporate and institutional customers through
NatWest Markets Plc and its subsidiaries.
RBS International serves retail, commercial
and corporate customers and financial
institutions and operates through The Royal
Bank of Scotland International (Holdings)
Limited and its subsidiaries.
The Group Nominations and Governance
Committee monitors the governance
arrangements of NatWest Group plc and its
subsidiaries and approves appointments to
the boards of principal and material regulated
subsidiaries, as described in the Group
Nominations and Governance Committee
report on page 106.
Corporate governance
How the Board operated in 2020
In March, reflecting the scale of the pandemic
and lockdown restrictions, the Board’s
operating rhythm was revised to facilitate
regular updates from the Group CEO and
executive management team. A cycle of
weekly meetings, later moving to fortnightly,
supplemented the Board’s scheduled
meetings, and all meetings took place
virtually.
At each scheduled Board meeting the
directors received reports from the Chairman,
Board Committee Chairs, Group CEO, Group
Chief Financial Officer (Group CFO) and other
members of the executive management team,
as appropriate. Other senior executives
attended Board meetings throughout the year
to present reports to the Board. This provided
the Board with an opportunity to engage
directly with management on key issues and
supports succession planning.
During 2020 there was continued focus on the
Board and Group Executive Committee
(ExCo) operating rhythm to support a
proactive and transparent agenda planning
and paper preparation process. This process
includes the following key elements:-
A pre-Board meeting with the Chairman,
Group CEO, Group CFO and Chief
Governance Officer and Company
Secretary to ensure the Board and
executive management are aligned on
Board agendas.
A post Board meeting with the Chairman,
Group CEO and Chief Governance Officer
and Company Secretary, to discuss what
went well/could be improved after each
meeting.
A look ahead paper at each ExCo and
Board meeting setting out key items that
will be discussed at the next meeting.
Principal areas of Board focus in 2020
As in 2019, a short set of Board Objectives
was adopted, closely aligned to our purpose
and strategic priorities. These have supported
agenda planning and helped to guide how the
Board spends its time, ensuring appropriate
focus on the longer-term and strategic issues.
An overview of the principal areas of Board
focus during 2020 is set out below:-
Purpose and Strategy
Strategy development and implementation
Consideration and approval of new
purpose
Company change of name
Purpose and progress against external
sustainability commitments
Customers
COVID-19 updates
Business reviews from main customer
businesses
Customer experience
Colleagues
COVID-19 updates
Executive appointments and executive
succession planning
Talent session
Colleague opinion survey results
Culture
Banking Standards Board (BSB) culture
assessment report
Modern Slavery and Human Rights
statements
Risk & Conduct
COVID-19 updates
Risk reports
Regulatory submissions
Risk appetite framework
Financial
COVID-19 updates
Capital distributions
Financial plans (budget, cost and
investment and scenario planning)
Brexit updates
Annual and quarterly results
IFRS9
Legal, Governance & Regulatory
Annual General Meeting (AGM)
arrangements
Board evaluation outcomes and Board
objectives
Legal and regulatory reports
Material regulatory correspondence
Annual review of the governance
framework and terms of reference for the
Board and its Committees
The Board also held two strategy sessions
with the executive management team, in June
and October 2020. This provided an
opportunity for the Board to assess
opportunities and risks to the future success
of the business, the sustainability of the
company’s business model and how its
governance contributes to the delivery of its
strategy.
Subsidiary governance and ring-fencing
NatWest Group plc is a listed company with
equity listed on the London and New York
stock exchanges.
NatWest Holdings Limited (NWH) is
the holding company for our ring-fenced
operations, which include our retail,
commercial and wealth management
services. A common board structure is
operated such that directors of NWH are also
directors of The Royal Bank of Scotland plc,
National Westminster Bank Plc and Ulster
Bank Limited. Known collectively as the NWH
Sub Group, the boards of these four entities
meet concurrently.
NatWest Group Annual Report and Accounts 2020
101
Corporate governance
2018 UK Corporate Governance Code
Throughout the year the company has applied
the Principles and complied with the
Provisions of the Code, except in relation to:
Provision 17 that the Group Nominations
and Governance Committee should
ensure plans are in place for orderly
succession to both the board and senior
management positions and oversee the
development of a diverse pipeline for
succession; and
Provision 33 that the Group Performance
and Remuneration Committee should have
delegated responsibility for setting
remuneration for the Chairman and
executive directors.
In both instances, the Board considers that
these are matters which should rightly be
reserved for the Board, as set out in more
detail in our statement of compliance on page
151.
In addition, the Board has delegated two
particular aspects of the Code’s provisions to
Board Committees, with regular updates
provided to the Board as appropriate:
The Group Audit Committee retains
responsibility for reviewing and monitoring
NatWest Group’s whistleblowing
procedures.
The Group Sustainable Banking
Committee considers key workforce
policies and practices (not related to pay)
to ensure they are consistent with NatWest
Group’s values and support long-term
sustainable success.
For further information please refer to the
relevant Committee reports on the following
pages.
Further information on how the company has
applied the Principles and complied with the
Provisions of the Code is set out below under
the Code’s 5 main section headings.
Board leadership and company purpose
Role of the Board
The Board is collectively responsible for
promoting the long-term sustainable success
of the company, driving both shareholder
value and contribution to wider society. The
Board’s role is to provide leadership of the
company within a framework of prudent and
effective controls which enables risk to be
assessed and managed. The Board
establishes NatWest Group’s purpose, values
and strategy and leads the development of
NatWest Group’s culture. The Board sets the
strategic aims of the company and its
subsidiaries, ensures that the necessary
resources are in place for NatWest Group to
meet its objectives, is responsible for the
raising and allocation of capital and reviews
business and financial performance. It
ensures that the company’s obligations to its
shareholders and other key stakeholders are
understood and met.
The Board terms of reference include a formal
schedule of matters specifically reserved for
the Board’s decision and are reviewed at least
annually. They are available on
natwestgroup.com.
Board Committees
The Board has established a number of Board
Committees with particular responsibilities.
Please refer to page 65 of the Strategic report
for more details. Board committee terms of
reference are available on natwestgroup.com.
Purpose, values, strategy and culture
In February 2020, and following an extensive
period of stakeholder engagement, the Board
approved NatWest Group’s purpose and
strategy. Our purpose has been a galvanising
force across the organisation as our response
to the pandemic has evolved, acting as an
important point of reference during Board
discussions, debate and decision-making. In
October 2020 the Board received an update
on NatWest Group’s progress in becoming a
purpose-led bank, covering achievements to
date and future priorities. Further information
on progress against our purpose and strategic
priorities can be found on pages 6 to 7 of the
Strategic report.
The Board is responsible for leading the
development of NatWest Group’s culture,
values and standards. The Board assesses
and monitors NatWest Group’s culture in
several ways. In February 2020,
representatives from the BSB joined a Board
meeting to present the results of their 2019
industry-wide survey and thematic reports,
together with their 2019 Assessment report on
NatWest Group. The Board also discussed an
internal review of the BSB’s thematic reports
on ‘Technology & Culture’ and ‘Decision-
Making’ from a NatWest Group perspective,
including impacts for customers and
employees.
In December 2020, the Group Sustainable
Banking Committee considered a summary of
the results of the BSB’s 2020 Assessment
report on NatWest Group, in advance of a
presentation by the BSB to the Board in
February 2021
The Group Sustainable Banking Committee
held a dedicated people and culture session
in December 2020 which included culture
measurement reporting, and this in turn
helped to support the Board on assessing
progress on building a healthy culture, and
alignment between culture and purpose
across NatWest Group.
For further information on the work of the
Group Sustainable Banking Committee, refer
to pages 116 to 117.
Colleague opinion survey results were
another useful culture oversight tool available
to the Board. Directors considered the results
of colleague pulse surveys conducted in May
and June, and in October 2020, reviewed the
results of the annual colleague opinion
survey, Our View. Key themes noted and
discussed by the Board were culture,
inclusion, capability, resilience and wellbeing
(including financial wellbeing and colleague
advocacy).
In December, as part of a spotlight on
colleagues, the Board received an update on
future ways of working and how this might
evolve in a way that is consistent with our
purpose and strategy; continues to support
colleagues; drives greater collaboration; and
supports the long-term sustainability of
NatWest Group.
Directors are mindful of their responsibility to
set the ‘tone from the top’ and take every
opportunity to role model the desired culture
both within the boardroom and beyond.
While opportunities for face to face interaction
with colleagues were significantly curtailed
during 2020, directors continued to engage
with colleagues virtually where possible, for
example through Colleague Advisory Panel
events, Committee function visits and a virtual
talent engagement session.
The activities described above have
supported the Board in meeting the Code
requirement to satisfy itself that the
company’s purpose, values, strategy and
culture are aligned.
Stakeholder engagement
In February 2020, the Board approved its
annual objectives and confirmed the Board’s
key stakeholder groups. The Board’s agenda
and engagement plans were structured to
enhance the Board’s understanding of these
stakeholders’ views and interests. This in turn
has informed Board discussions and decision-
making.
NatWest Group’s Colleague Advisory Panel
was set up in 2018 to help promote colleague
voices in the boardroom and supports our
compliance with Code requirements in relation
to Board engagement with the workforce.
For further details on Board engagement with
shareholders and other stakeholders,
including how planned engagement activity
was adapted in light of COVID-19 restrictions
and the role and activities of the Colleague
Advisory Panel, refer to the section 172(1)
statement on page 48 of the Strategic report.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
102
Executive Management
The Group CEO is supported by Group ExCo,
which considers strategic, financial, capital,
risk and operational issues affecting NatWest
Group and reviews relevant matters in
advance of Board submission. Group ExCo’s
membership comprises the Group CEO,
Group CFO and the Group Chief Risk Officer;
who are also members of the wider executive
management team. Biographies of the
executive management team can be found on
natwestgroup.com.
Time commitment
It is anticipated that non-executive directors
will allocate sufficient time to the company to
discharge their responsibilities effectively and
will devote such time as is necessary to fulfil
their role. Directors have been briefed on the
limits on the number of other directorships
that they can hold under the requirements of
the fourth Capital Requirements Directive.
The Code emphasises the importance of
ensuring directors have sufficient time to meet
their board responsibilities. Prior to
appointment, significant commitments require
to be disclosed with an indication of the time
involved. External appointments require prior
Board approval, with the reasons for
permitting significant appointments explained
in the annual report. No such disclosures are
required for 2020.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
The Board continues to monitor the
commitments of the Chairman and directors
and is satisfied that they are able to allocate
sufficient time to enable them to discharge
their duties and responsibilities effectively.
Information
All directors receive accurate, timely and clear
information on all relevant matters and have
access to the advice and services of the Chief
Governance Officer and Company Secretary.
In addition, all directors are able, if necessary,
to obtain independent professional advice at
the company’s expense.
The format for Board and Board Committee
papers was further enhanced during 2020 and
now includes a dedicated section which
explains how the proposal or update aligns to
our purpose, alongside existing sections
detailing stakeholder impacts. This ensures
that due consideration is given to our purpose
and our stakeholders in the boardroom and
supports the Board’s oversight of NatWest
Group’s progress and performance as a
purpose-led organisation.
Corporate governance
The effectiveness of Board stakeholder
engagement mechanisms is considered
during the annual Board evaluation. Further
details of the outputs of the 2020 evaluation in
relation to stakeholder engagement can be
found on page 104.
Chairman and Group CEO
The role of Chairman is distinct and separate
from that of the Group CEO and there is a
clear division of responsibilities, with the
Chairman leading the Board and the Group
CEO managing the business day to day.
Further details on NatWest Group’s approach
to investing in and rewarding its workforce can
be found on page 57 of the Strategic report
(Our Colleagues).
Workforce policies and practices
As referred to above, the Board has delegated
certain Code provisions to Board Committees,
with regular updates to the Board on relevant
issues. The Group Sustainable Banking
Committee considers key workforce policies
and practices (not related to pay) to ensure
they are consistent with NatWest Group’s
values and support long term sustainable
success. The Group Audit Committee retains
responsibility for reviewing and monitoring
NatWest Group’s whistleblowing procedures.
Further details on Speak Up, NatWest
Group’s whistleblowing service, can be found
on page 58 of the Strategic report.
Conflicts of interest
The Directors’ Conflicts of Interest policy sets
out procedures to ensure that the Board’s
management of conflicts of interest and its
powers for authorising certain conflicts are
operating effectively.
Each director is required to notify the Board of
any actual or potential situational or
transactional conflict of interest and to update
the Board with any changes to the facts and
circumstances surrounding such conflicts.
Situational conflicts can be authorised by the
Board in accordance with the Companies Act
2006 and the company’s Articles of
Association. The Board considers each
request for authorisation on a case by case
basis and has the power to impose conditions
or limitations on any authorisation granted as
part of the process. Details of all directors’
conflicts of interest are recorded in a register
which is maintained by the Chief Governance
Officer and Company Secretary and reviewed
annually by the Board.
Division of responsibilities
The Board has 11 directors comprising the
Chairman, two executive directors and eight
independent non-executive directors, one of
whom is the Senior Independent Director.
Director biographies and details of the Board
Committees of which they are members can
be found on pages 97 and 98.
Non-executive director independence
The Board considers that the Chairman was
independent on appointment and that all
current non-executive directors are
independent for the purposes of the Code.
Senior Independent Director
Throughout 2020, Mark Seligman, as Senior
Independent Director, acted as a sounding
board for the Chairman, and as an
intermediary for other directors when
necessary. He was also available to
shareholders to discuss any concerns they
may have had, as appropriate.
Non-executive directors
Along with the Chairman and executive
directors, the non-executive directors are
responsible for ensuring the Board fulfils its
responsibilities under its terms of reference.
The non-executive directors combine broad
business and commercial experience with
independent and objective judgement. They
provide constructive challenge, strategic
guidance, and specialist advice to the
executive directors and the executive
management team and hold management to
account.
The balance between non-executive and
executive directors enables the Board to
provide clear and effective leadership across
NatWest Group’s business activities and
ensures no one individual or small group of
individuals dominates the Board’s decision-
making.
The Chairman and non-executive directors
meet at least once every year without the
executive directors present.
Details of the key responsibilities of the
Chairman, Group CEO, Senior Independent
Director and non-executive directors are
available on natwestgroup.com.
The performance of the Chairman and non-
executive directors is evaluated annually and
further details of the process undertaken can
be found on page 105.
Chief Governance Officer and Company
Secretary
The Chief Governance Officer and Company
Secretary, Jan Cargill, works closely with the
Chairman to ensure effective and efficient
functioning of the Board and appropriate
alignment and information flows between the
Board and its Committees.
The Chief Governance Officer and Company
Secretary is responsible for advising the
Board and individual directors on all
governance matters, and also facilitates
Board induction and directors’ professional
development.
NatWest Group Annual Report and Accounts 2020
103
Corporate governance
Induction and professional development
Each new director receives a formal induction
on joining the Board, which is co-ordinated by
the Chief Governance Officer and Company
Secretary and tailored to suit the requirements
of the individual concerned. This includes
visits to NatWest Group’s major businesses
and functions and meetings with directors and
senior management. Meetings with external
auditors, counsel and stakeholders are also
arranged as appropriate.
All new directors receive a copy of the
NatWest Group Director Handbook. The
Handbook operates as a consolidated
governance support manual for directors of
NatWest Group plc and the NWH Sub Group,
providing both new and current directors with
a single source of information relevant to their
role. It covers a range of topics including
NatWest Group’s corporate structure; the
Board and Board Committee operating model;
Board policies and processes and a range of
technical guidance on relevant matters
including directors’ duties, conflicts of interest,
and the UK Senior Managers’ Regime. The
Handbook forms part of a wider library of
reference materials available via our
resources portal.
Directors have access to a wide range of
briefing and training sessions and other
professional development opportunities.
Internal training relevant to the business of
NatWest Group is also provided. Directors
undertake the training they consider
necessary to assist them in carrying out their
duties and responsibilities. The non-executive
directors discuss their training and
professional development with the Chairman
at least annually.
With significant demands on Board time due
to COVID-19, our Board training programme
prioritised key areas of focus including
financial crime and climate.
Composition, succession and evaluation
The Board is structured to ensure that the
directors provide NatWest Group plc with the
appropriate combination of skills, experience
and knowledge as well as independence.
Given the nature of NatWest Group’s
businesses, experience of banking and
financial services is clearly of benefit, and the
Board has a number of directors with
substantial experience in that area, including
retail and commercial banking. In addition, the
directors have relevant experience in
customer service; government and regulatory
matters; mergers and acquisitions; corporate
recovery, resolution and insolvency;
stakeholder management; environmental,
social and governance, technology, digital and
innovation; finance and accountancy; risk; and
change management.
Board Committees also comprise directors
with a variety of skills and experience so that
no undue reliance is placed on any one
individual.
Further information on Board appointments
and succession planning can be found in the
Group Nominations and Governance
Committee report on page 106.
Election and re-election of directors
In accordance with the provisions of the Code,
all directors stand for election or re-election by
shareholders at the company’s AGM.
In accordance with the UK Listing Rules, the
election or re-election of independent
directors also requires approval by a majority
of independent shareholders.
2020 Board Evaluation
In accordance with the Code, an external
evaluation of the Board, its Committees and
individual directors takes place every three
years. An internal evaluation takes place in
the intervening years. The last external
evaluation was conducted in 2018.
Progress following the 2019 evaluation
A number of actions were progressed during
2020 in response to the findings of the 2019
internal performance evaluation.
A set of Board objectives was agreed for
the year. Similar to 2019, these guided
agenda planning and helped to ensure
appropriate focus on the longer-term and
strategic issues.
A comprehensive review of Board
composition and succession planning was
carried out by the Group Nominations and
Governance Committee, including a review
of the Board skills matrix and the overall
balance of skills, knowledge, experience
and diversity on the Board. Following this
review, the Board approved the Board and
Board Committee membership changes
described earlier in this report. These
changes addressed a number of focus
areas identified during the 2019 evaluation,
including reducing Board size, adding
technology experience to the Board and
improving Board diversity.
Management reporting changes were
introduced to provide consistent and
concise information on key metrics and
trends to the Board to support more
focussed debate. Board paper templates
were further enhanced to support purpose
alignment.
A virtual talent session enhanced the
Board’s visibility of the executive talent
pipeline.
2020 Performance evaluation
The 2020 Board evaluation was internally
facilitated by the Chief Governance Officer
and Company Secretary, Jan Cargill, during
Q4 2020. The process included:
holding 1:1 interviews with directors;
discussing key findings and
recommendations for action with the
Chairman; and
presenting a final report to the Board.
Key findings and recommendations
The conclusion of the 2020 Board evaluation
was that the Board operated effectively
throughout the year and fulfilled its
remit as set out in its terms of reference.
Directors engaged fully with the evaluation
exercise and commented positively in relation
to many aspects of the Board’s operations.
Key findings and recommendations included
the following
COVID-19 response - Directors felt that
management had responded well to the
pandemic. The Board had been kept
regularly informed throughout, providing
constructive challenge and support as
appropriate, and virtual board meetings
had worked efficiently.
Purpose and strategy – Directors agreed
that NatWest Group’s purpose was clear
and compelling, and that it was starting to
embed and guide Board discussions and
decision-making. The annual Board
objectives were considered useful, but
directors said a shorter list of focus items
would be more impactful.
Board stakeholder engagement –
Engagement activity during the year had
been worthwhile, despite limited
opportunities for face to face meetings.
Board sessions with institutional investors
had been particularly useful, and the
Colleague Advisory Panel was working
well. Directors were keen to explore
different options to engage with customers
and understand their views. They were
also interested in deeper customer insights
and further focus on key supplier
relationships.
Board composition and succession
planning – The majority of directors felt the
Board is now right-sized with no material
skills gaps. Directors expressed a desire
for greater visibility of ExCo successors.
Board culture and dynamics – The 2019
evaluation had identified Board dynamics
as an area for further improvement. In
2020, directors commented positively on
Board culture and dynamics, noting an
improvement over the past 12 months.
Relationships were considered to be good,
although directors missed the opportunity
for informal interaction due to COVID-19
restrictions. Directors felt the balance of
responsibilities between the Board and
Board Committees was appropriate.
How the Board operates - The Board’s
operating rhythm and increased meeting
frequency had worked well. Directors
expressed an interest in more in-depth
business discussions and some observed
there was scope to streamline Committee
Chair reporting. Directors appreciated the
enhanced approach to management
reporting and observed that Board paper
templates continued to drive better and
shorter papers.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
104
Corporate governance
Actions
Following Board discussion of the evaluation
report, a number of actions were agreed for
2021, including the following:
Agree a shorter and more focused set of
Board objectives for 2021.
Explore different options for directors to
engage with customers.
Review potential enhancements to Board
Management Information on customers
and suppliers.
Enhance Board visibility of ExCo
successors.
Implementation of the 2020 Board evaluation
actions will be overseen by the Group
Nominations and Governance Committee
during 2021.
Committee evaluations
Details of the Board Committee evaluations
carried out during 2020 can be found in the
Committee reports.
Individual director and Chairman effectiveness
reviews
The Chairman met each director individually
to discuss their own performance and
continuing professional development and
establish whether each director continues to
contribute effectively to the company’s long-
term sustainable success. The Chairman also
shared peer feedback provided to the Chief
Governance Officer and Company Secretary
as part of the individual evaluation process.
Separately, the Senior Independent Director
sought feedback on the Chairman’s
performance from the non-executive directors,
executive directors and other key internal and
external stakeholders and discussed it with
the Chairman.
Audit, Risk & Internal Control
Information on how the company has applied
the Principles and complied with the
Provisions set out in this section of the Code
can be found throughout the Annual Report
and Accounts. The following sections are of
particular relevance:
the Group Audit Committee Chairman’s
letter and the report of the Committee (on
page 107) which sets out the process
undertaken to evaluate the effectiveness of
both the Internal Audit function and the
external auditors in 2020, and the principal
findings thereof. It also explains the
approach taken to ensuring the integrity of
financial and narrative statements, and
confirms that it supports the Board in the
assessment of the Group’s disclosures to
be fair, balanced and understandable;
the Viability Statement (page 67) which
details how the Board has assessed the
future prospects of NatWest Group plc and
the ways in which risks are considered and
managed in order to achieve its strategic
objectives;
the Compliance report (page 151), which
explains the internal control framework in
place; and
the Board Risk Committee Chairman’s
letter and report of the Committee (page
112) which explains how the Board
oversees the principal risks facing NatWest
Group and how management addresses
these.
Remuneration
The directors’ remuneration report on pages
119 to 130 provides information on the
activities of the Group Performance and
Remuneration Committee, the decisions taken
on remuneration during the year and why the
Committee believes these are the right
outcomes in the circumstances. The report
also details how the remuneration policy for
executive directors supports the delivery of
the company’s strategic goals and purpose,
with significant delivery in shares to provide
long-term alignment with shareholders.
Information is also included on wider
workforce remuneration and the steps taken
to ensure fair pay and a healthy culture.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
105
Report of the Group Nominations and Governance Committee
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Letter from Howard Davies
Chairman of the Group Nominations and
Governance Committee
Dear Shareholder,
As Chairman of the Board and Chairman of
the Group Nominations and Governance
Committee I am pleased to present our report
on the Committee's activity during 2020.
Role and responsibilities
The Committee is responsible for reviewing
the structure, size and composition of the
Board, and membership and chairmanship of
Board Committees and recommends
appointments to the Board. In addition, the
Committee monitors NatWest Group’s
governance arrangements to ensure that best
corporate governance standards and
practices are upheld and considers
developments relating to banking reform and
analogous issues affecting NatWest Group.
The Committee makes recommendations to
the Board in respect of any consequential
amendments to NatWest Group’s operating
model.
The terms of reference of the Committee are
reviewed annually, approved by the Board
and are available at www.natwestgroup.com.
Principal activity during 2020
As highlighted in the Board’s 2019
effectiveness review, the Committee
acknowledges the tenure of a number of
current Board directors and therefore made
succession planning a priority in 2020. The
Committee reviewed the contribution of a
number of Board members under the Board
Appointment Policy which sees non-executive
directors appointed for an initial three year
term, subject to annual re-election at the
AGM. Following assessment by the
Committee, they may then be appointed for a
further three year term. Non-executive
directors may continue to serve beyond six
years, subject to a maximum tenure of nine
years.
In addition to reviewing the structure, size and
composition of the NatWest Group plc Board,
the Committee has also continued to oversee
work aimed at further enhancing the Group’s
subsidiary governance framework. A number
of our material regulated subsidiaries made
appointments to their boards during 2020,
which the Committee has overseen. Spencer
Stuart and Green Park have been engaged
during the year to support NatWest Group’s
subsidiary board search activity. The firms are
members of the retained executive search
panel of suppliers (managed by NatWest
Executive Search). Spencer Stuart also
provide leadership advisory and senior
executive search and assessment services to
the Human Resources function.
In addition to succession planning, the
Committee has overseen the process to reach
agreement with the PRA in respect of the
renewal of regulatory modifications which
ensure the continuation of a governance
model that is compatible with ring-fencing
legislation.
Membership and meetings
At the same time as standing down from the
Board, Baroness Noakes stepped down from
the Committee with effect from 31 July 2020.
Morten Friis joined the Committee on 1
August 2020 meaning that throughout 2020
the Committee comprised the Chairman of the
Board and four independent non-executive
directors. Graham Beale also observes
meetings of the Committee in his capacity as
Senior Independent Director of NWH Ltd and
member of the NWH Ltd Nominations
Committee.
The Committee holds a minimum of four
meetings per year and meets on an ad hoc
basis as required. In 2020, there were five
meetings – four scheduled meetings and one
ad hoc. Individual attendance by directors at
these meetings is shown in the table on page
100.
Tenure of non-executive directors
The tenure of non-executive directors as at 31
December 2020 is set out below.
0 – 3 years
3 – 6 years
6+ years
33%
45%
22%
100%
Performance evaluation
The review of the effectiveness of the Board
and its senior Committees was conducted
internally in 2020. The Committee has
considered and discussed the outcomes of
the evaluation and accepts the findings.
Overall, the review concluded that the
Committee operated effectively with no
material recommendations being identified for
action. The Committee will continue to ensure
that the full Board is appropriately sighted on
the work of the Committee.
The Committee will track progress during the
year.
Boardroom Inclusion Policy
The Board operates a Boardroom Inclusion
Policy which reflects the most recent industry
targets and is aligned to the NatWest
Inclusion Policy and Principles applying to the
wider bank. This policy provides a framework
to ensure that the Board attracts, motivates
and retains the best talent and avoids limiting
potential caused by bias, prejudice or
discrimination. The policy currently applies to
the most senior NatWest Group boards:
NatWest Group plc, NWH Ltd, NWB Plc, RBS
plc and Ulster Bank Limited. A copy of the
Boardroom Inclusion Policy is available on
natwestgroup.com>who we are.
Objectives and targets
The Boardroom Inclusion Policy’s objectives
ensure that the Board, and any Committee to
which it delegates nominations
responsibilities, follows an inclusive process
when making nomination decisions. That
includes ensuring that the nomination process
NatWest Group Annual Report and Accounts 2020
106
is based on the principles of fairness, respect
and inclusion, that all nominations and
appointments are made on the basis of
individual competence, skills and expertise
measured against identified objective criteria
and that searches for Board candidates are
conducted with due regard to the benefits of
diversity and inclusion.
The Boardroom Inclusion Policy contains a
number of measurable objectives, targets and
ambitions reflecting the ongoing commitment
of the Board to inclusion progress. The Board
aims to meet the highest industry standards
and recommendations wherever possible.
That includes, but is not limited to, aspiring to
meet the targets set by the Hampton-
Alexander Report: FTSE100 Women Leaders
(33% female representation on the boards)
and the Parker Report: Beyond 1 by ’21 (at
least one director from an ethnic minority
background on the boards) by 2020/2021.
The policy supports our bank-wide ambition to
aim for a 50/50 gender balance across all
levels of the organisation by 2030.
Monitoring and reporting
The boards of NatWest Group plc and the
NWH Group meet consecutively and share a
largely common membership. When
considered together, the director population
across both boards currently meets the Parker
target and exceeds the Hampton-Alexander
target with a female representation of 36%.
Notwithstanding the largely common
membership between boards, NatWest
remains committed to ensuring that the
NatWest Group plc Board meets the targets
on a standalone basis. The NatWest Group
plc Board currently meets the Parker Target
and, notwithstanding the departures of Alison
Davis and Baroness Noakes during 2020,
continues to exceed the Hampton-Alexander
target with a board composition including 36%
female representation.
Diversity and inclusion progress, including
information about the appointment process,
will continue to be reported in the Group
Nominations and Governance Committee’s
report in the NatWest Group plc Annual
Report and Accounts. The balance of skills,
experience, independence, knowledge and
diversity on the Board, and how the Board
operates together as a unit is reviewed
annually as part of the Board evaluation.
Where appropriate, findings from the
evaluation will be considered in the search,
nomination and appointment process. Further
details on NatWest Group’s approach to
diversity can be found on page 60.
Howard Davies
Chairman of the Group Nominations and
Governance Committee
19 February 2021
Report of the Group Audit Committee
The unprecedented impact the pandemic has
had on the UK and global economies, coupled
with the extensive government support for
those affected by the pandemic, has
presented challenges to all banks in modelling
the likely impact under IFRS9. In the absence
of relevant historic data points to model the
impact of the crisis, the Committee found the
benchmarking information provided by
external parties particularly helpful. The
Committee has supported enhancements to
internal modelling processes implemented by
management during 2020. In light of the
economic conditions throughout the year it
was necessary to overlay judgements to the
modelled outputs. While such decisions are
never easy, as by their nature they are highly
subjective, the Committee was satisfied the
approach taken by management to apply
overlays and post-model adjustments was
robust and consistently applied. The internal
and external auditors also undertook work to
provide comfort to the Committee in this
respect. In addition, the Committee was
satisfied with the assessments of the internal
control environment, particularly given the
challenges resulting from the COVID-19
pandemic, and supported management’s
plans to further enhance it.
As well as reviewing financial information, the
Committee also considers NatWest Group’s
non-financial reporting. In this respect, the
Committee reviewed the climate-related
disclosures published alongside this report.
The Committee is satisfied that the
information contained in the document is
consistent with that published in the Annual
Report and Accounts and subject to robust
controls.
“Throughout nearly all its work in
2020 the COVID-19 pandemic has
been a key consideration”
Oversight of the performance of the internal
audit function and ensuring its independence
is a key responsibility of the Committee. In
order to maintain the perceived independence
of the Chief Audit Executive, I oversaw the
process to appoint a new individual to the role
in 2020. I was pleased that there was a high-
quality pool from which we selected a strong
candidate, who takes on the role in February
2021. I am grateful to the outgoing Chief Audit
Executive for his professionalism and support
during the process and his significant
contribution to the bank over the past 9 years.
I would like to take this opportunity to thank all
Committee members for their diligent
contributions in 2020, including Baroness
Noakes who stood down from the Board in
July 2020. I was pleased to welcome Robert
Gillespie to the Committee in August 2020,
who brings with him a wealth of experience.
Patrick Flynn
Chairman of the Group Audit Committee
19 February 2021
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Meetings and visits
Five scheduled meetings of the Committee
were held in 2020, four of which took place
immediately prior to the release of the
financial results each quarter. During the year
all members attended the scheduled
meetings, one of which was held in person
and the remainder via video conferencing
facilities. Two ad hoc meetings were held to
consider regulatory submissions, including
additional Pillar 3 disclosures requested by
the regulators to reflect the impact of the
COVID-19 pandemic.
The annual programme of visits to control
functions – held in conjunction with the Board
Risk Committee – was undertaken virtually
this year in order to comply with social
distancing requirements. Constructive and
insightful discussions were held with Risk,
Internal Audit and Finance.
Performance evaluations
The annual review of the effectiveness of the
Board and its senior Committees, including
the Audit Committee, was conducted
internally in 2020. Themes focused on during
the Committee’s discussion session included:
operating rhythm; effectiveness and dynamics
of meetings; and future priorities. It was
determined that the GAC had continued to
operate effectively during 2020. Certain areas
to be strengthened were identified and will be
progressed in 2021.
The performance of the External Auditor and
the Internal Audit function were monitored by
the GAC in 2020 and assessed at the end of
the year via an internal process. Feedback
was provided by relevant stakeholders and a
summary reviewed by the Committee.
Progress made to address the
recommendations of the previous year’s
evaluations was welcomed.
Letter from Patrick Flynn
Chairman of the Group Audit Committee
Dear Shareholder,
I am pleased to share with you a summary of
the work undertaken by the Group Audit
Committee (GAC) in 2020.
The Committee is responsible for overseeing
and challenging the processes undertaken by
management in the preparation of the
published quarterly financial information. It
also assists the Group Board in carrying out
its responsibilities relating to accounting
policies and internal control functions.
In 2020 the Committee’s primary focus has
continued to be on reviewing the integrity and
quality of NatWest Group’s published financial
information, including the quarterly, interim
and full year results announcements, Annual
Report and Accounts, Pillar 3 and Form 20-F
releases. In each case the Committee
received detailed reports on the judgements
applied by management in the preparation of
the financial statements and legal and
regulatory developments. Consideration was
also given to management’s assessment of
the internal controls over financial reporting
and the GAC also received reports from both
the internal auditors on the internal control
environment and the external auditors on
internal controls over financial reporting and
key accounting and judgemental matters.
Throughout nearly all its work in 2020 the
COVID-19 pandemic has been a key
consideration. Much time was dedicated to
reviewing accounting judgements and the
potential and actual impact on expected credit
losses, including modelling methodologies, as
well as impairment levels and guidance.
Membership
Full biographical details of the members of the
Committee during 2020 are set out on pages
97 and 98. The members are all independent
non-executive directors who also sit on other
Board committees in addition to the GAC (as
set out in their biographies). This common
membership helps facilitate effective
governance across all finance, risk and
remuneration matters and ensures that
agendas are aligned, and duplication of
responsibilities is avoided.
Members of the GAC are selected with a view
to the expertise and experience of the
Committee as a whole and with proper regard
to the key issues and challenges facing the
NatWest Group. The Board is satisfied that all
GAC members have recent and relevant
financial experience and are independent as
defined in the SEC rules under the US
Securities Exchange Act of 1934 (the
‘Exchange Act’) and related guidance. The
Board has further determined that Patrick
Flynn, Mark Seligman, Robert Gillespie and,
during her tenure as a member of the
Committee, Baroness Noakes, are all
‘financial experts’ for the purposes of
compliance with the Exchange Act Rules and
the requirements of the New York Stock
Exchange, and that they have competence in
accounting and/or auditing as required under
the Disclosure Guidance and Transparency
Rules.
NatWest Group Annual Report and Accounts 2020
107
Report of the Group Audit Committee
Matter
Context of discussion
How the committee addressed the matter
Financial and
non-financial
reporting
The GAC considered
a number of
accounting
judgements and
reporting issues in
the preparation of
NatWest Group’s
financial results
throughout 2020.
The GAC then
recommended the
quarterly, interim and
full year results
announcements, the
Annual Report and
Accounts, together
with supporting
documentation
(including Pillar 3
reports, financial
supplements and
investor
presentations) and
the Form 20-F to the
Group Board for
approval.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Expected Credit Losses – Judgements (including overlays) in relation to credit impairments and the
impact of macro-economic risks on the credit environment, in particular those arising from the
COVID-19 pandemic, were discussed throughout the year. The GAC focused on the key
assumptions, methodologies and in-model and post-model adjustments applied to provisions under
IFRS 9. The Committee discussed these in detail with management and was satisfied that they
were reasonable in the exceptional circumstances and had been applied consistently. External
benchmarking data, where available, and historic loss experience helped inform considerations in
this respect. The economic uncertainty and unprecedented conditions not experienced since the
implementation of IFRS 9 challenged the usefulness of model outputs. While the use of
judgemental overlays and post-model adjustments should ideally be limited, their extensive use
was deemed appropriate during 2020, and are likely to continue to be required in future reporting
periods.
Valuation methodologies – The GAC considered valuation methodologies and assumptions for; the
impacts of the COVID-19 pandemic and resultant volatility, financial instruments carried at fair
value and scrutinised judgements made by management in relation to the carrying value of
intangible assets.
Provisions and disclosures – The GAC debated the level and appropriateness of provisions for
regulatory, litigation and conduct issues during the year and was satisfied with them. The
Committee considered the various conduct provisions during the year and are satisfied that the
levels are appropriate. The Committee supported the release of £277m of the provision for
Payment Protection Insurance (PPI) during the year.
Treatment of goodwill – Given the economic uncertainty caused by the COVID-19 pandemic, the
Committee considered the treatment of goodwill throughout the year, in particular in Commercial
Banking. Significant challenge and discussion took place in the context of the H1 interim and full
year results with both management and the external auditor to ensure the most appropriate course
of action was followed. The Committee was satisfied with the carrying value of goodwill and that
appropriate disclosure was made and supported the ongoing close monitoring of goodwill by
management in the context of the continued market disruption.
Accounting Developments – The GAC studied the impact of various changes to accounting
standards during 2020, including: the adoption of phase two of the IBOR guidance which includes
amendments to IAS 39/ IFRS 9; the replacement of IAS 1; and the move to UK-based IFRS. The
Committee has also considered any changes in accounting policy.
Reporting matters – The Committee reflected on a number of proposed changes to reporting
requirements – for example the recommendations of the Brydon Report – and in particular any
elements which could be adopted early. The publication of climate-related disclosures aligned to
the Taskforce for Climate related Financial Disclosures (TCFD) alongside this Annual Report and
Accounts (ahead of the regulatory deadline) demonstrates NatWest Group’s commitment to early
adoption of reporting requirements.
Viability statement and the going concern basis of accounting – The GAC considered evidence of
NatWest Group’s capital, liquidity and funding position and considered the process to support the
assessment of principal risks, taking into account the additional industry guidance on the matter
during the COVID-19 pandemic. The GAC reviewed the company’s prospects in light of its current
position, the identified principal and emerging risks and the ongoing economic uncertainty resulting
from the pandemic. A range of adverse economic scenarios were examined to understand the
potential impacts of the pandemic on the bank, and peer comparisons considered to further inform
the position. The GAC reviewed NatWest Group’s going concern and expanded viability
statements and recommended them to the Board. (refer to the Report of the directors for further
information.)
Fair, balanced and understandable – The GAC oversaw the review process which supports the
Committee and Board in concluding that the disclosures in the Annual Report and Accounts, taken
as a whole, are fair, balanced and understandable and provided the information necessary for
shareholders to assess the company’s position and performance, business model and strategy.
The process included: central co-ordination of the annual report and accounts by the Finance
function; review of the Annual Report and Accounts by the Executive Disclosure Committee prior to
consideration by the GAC; and a management certification process. Particular consideration was
given to the way in which information around the impacts of the COVID-19 pandemic was
presented. The External Auditor also considered the fair, balanced and understandable statement
as part of the year end audit process.
Non-financial reporting – As global focus on and publication of non-financial information increases
the Committee has received a number of presentations on the firm’s approach to non-financial
disclosures. It has put particular emphasis on the high standards of control expected to support the
preparation of this information. The Committee was satisfied the non-financial disclosures and the
processes undertaken by management in their preparation of these were robust and
recommended the disclosures to the Group Board for approval prior to external release. These
disclosures are published as part of a suite of year end documents, which is a move away from an
all-encompassing Annual Report and Accounts.
NatWest Group Annual Report and Accounts 2020
108
Report of the Group Audit Committee
Matter
Context of discussion
How the committee addressed the matter
Systems of
internal
control
Systems of internal
control relating to
financial
management,
reporting and
accounting issues is
a key area of focus
for the Committee. In
2020 it received
reports throughout
the year on the topic
and evaluated the
effectiveness of
NatWest Group’s
internal control
systems, including
any significant failings
or weaknesses.
Sarbanes-Oxley Act of 2002 – The GAC considered NatWest Group’s compliance with the
requirements of section 404 of the Sarbanes-Oxley Act of 2002. Following interim updates on the
status of the bank’s internal controls over financial reporting during 2020 to monitor progress, the
GAC was satisfied that there were no Material Weaknesses for NatWest Group at the year-end.
Additional work was undertaken to monitor and address the challenges to the control environment
resulting from COVID-19, in particular those related to the introduction of new products and the
increased risk of fraud. The Committee also reviewed the process undertaken to support the CEO
and CFO in providing the certifications required under sections 302, 404 and 906 of the Sarbanes-
Oxley Act of 2002.
Control Environment Certification – The GAC considered the control environment ratings of the
businesses, functions and material subsidiaries and management’s actions to ensure that the
control environment was maintained throughout new working arrangements brought about by the
COVID-19 pandemic and plans to address areas of weakness.
Notifiable Event Process – The GAC considered semi-annual reports on control breaches,
captured by the internal notifiable event process. All Board directors were alerted to the most
significant breaches as part of that process.
Whistleblowing – The GAC monitored the effectiveness of the bank’s whistleblowing process and
received updates on the volume of whistleblowing reports and any common themes. The results of
the annual Our View survey indicated that colleagues’ awareness of how to raise concerns was
high and that the majority of colleagues felt it safe to do so. The GAC Chairman acts as the Group
Whistleblowers’ Champion, in line with PRA and FCA regulations, and meets regularly with the
whistleblowing team. Discussions regarding subsidiary whistleblowing matters were held with the
relevant subsidiary audit committee chairmen as required.
Legal and Regulatory Reports – Quarterly reports on the material, current and emerging legal and
regulatory investigations, risks and developments affecting NatWest Group enabled the Committee
to assess the related disclosures in the financial statements.
Taxation – The GAC received an update on the bank’s tax position and discussed matters
including tax disclosures and provisions, tax risks, NatWest Group’s tax compliance status, the
relationship with HMRC, employment tax matters, ongoing tax projects, the UK Bank Levy and
emerging and forthcoming tax issues (including those relating to uncertain tax positions).
Risk and Control Disclosure – The GAC also reviewed the disclosure on internal control matters in
conjunction with the related guidance from the Financial Reporting Council.
Capital – The GAC reviewed NatWest Group’s controls over the calculation and reporting of Risk
Weighted Assets and related regulatory developments.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
109
Report of the Group Audit Committee
Matter
Context of discussion
How the committee addressed the matter
Internal audit
The GAC is
responsible for
overseeing the
Internal Audit
function. In addition
to considering
quarterly opinions
from Internal Audit,
the GAC is required
to monitor the
function’s
effectiveness and its
independence. The
GAC was fully
satisfied in this
regard.
Opinions – Quarterly opinion reports were provided to the Committee by Internal Audit, setting out
its view of the overall effectiveness of NatWest Group’s governance, risk management and
internal control framework, current issues and the adequacy of remediation activity. Internal Audit
also outlined material and emerging concerns identified through their audit work. The Committee
noted the responses of management to the points highlighted by Internal Audit and welcomed their
commitment to addressing any control environment weaknesses. The impact of manual
processing on the control environment was a particular focus for the Committee, and efforts to
increase automation, particularly in Finance, will be monitored in 2021. In addition, Internal Audit
reviewed the consistency of disclosures in NatWest Group’s quarterly Pillar 3 reporting and their
report was provided to the Committee Chairman prior to the disclosures being approved for
release.
Annual Plan and Budget – GAC considered and approved Internal Audit’s 2020 plan and budget at
the end of 2019. In light of the COVID-19 pandemic the 2020 plan was revised and submitted to
the Committee for approval in July 2020. At the end of 2020 the GAC considered and approved
Internal Audit’s plan and budget for 2021. The Committee was satisfied that Internal Audit had and
will have adequate budget and appropriate resources to deliver its plan. In addition, the Committee
was satisfied that the audit universe appropriately reflects the challenges facing NatWest Group
over the coming year.
Internal Audit Charter and Independence – The GAC reviewed and approved the Internal Audit
Charter and noted the Chief Audit Executive’s independence statement. In line with the revised
industry guidance issued in September 2017, and in light of the current Chief Audit Executive
(CAE) having been in role for 9 years, it was determined that it would be appropriate to appoint a
new CAE in order to maintain the independence and perceived independence of both the role and
the wider IA function. The recruitment process was overseen by the Chairman of the GAC and
involved an internal and external search. The successful candidate joined the bank this month.
Performance – In 2020 the CAE continued to report to the GAC Chairman, with a secondary
reporting line to the Chief Executive for administrative purposes. The GAC assessed the annual
performance (including risk performance) of the function and CAE. The remuneration
arrangements for both the incoming and outgoing CAEs were also determined by the GAC
Chairman with input from the Chief Executive and support of the wider Committee members.
Visit – Together with the BRC, the GAC participated in a successful virtual deep dive session with
members of the Internal Audit team during 2020. A variety of issues impacting the Internal Audit
function were discussed, including operating during COVID-19, the function’s work on behavioural
risk and financial crime, audit quality, and building capability in the function.
Evaluation – The 2020 evaluation of the Internal Audit function was carried out internally. Key
stakeholders across the bank, including the GAC members, attendees and the external auditors,
provided feedback, identifying areas of particular strength and those for enhancement. The overall
findings were positive, and the Internal Audit function was found to be operating effectively with
continued improvement in most areas being noted. Certain areas for continued development were
identified, including improving bench strength in certain areas and increasing use of analytic tools;
progress will be overseen by the GAC.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
110
Report of the Group Audit Committee
Matter
Context of discussion
How the committee addressed the matter
External audit
Ernst & Young LLP
(EY) has been
NatWest Group’s
external auditor since
2016, following a
tender process
carried out in 2014.
The GAC has
responsibility for
monitoring the
independence and
objectivity of the
External Auditor, the
effectiveness of the
audit process and for
reviewing the bank’s
financial relationship
with the External
Auditor and fixing its
remuneration.
Audit and
non-audit
services
NatWest Group has
a policy in relation to
the engagement of
the external auditors
to perform audit and
non-audit services
(the policy).
The GAC reviews the
policy annually to
ensure it remains fit
for purpose. All audit
and non-audit
services are pre-
approved by, or on
behalf of, the GAC to
safeguard the
external auditor’s
independence and
objectivity.
External Audit Reports – EY’s lead audit partner, Jonathan Bourne, reported to the GAC each
quarter on the audit related work and conclusions of the External Auditor. This included EY’s view
of the judgements made by management, their compliance with International Financial Reporting
Standards and their observations and assessment of effectiveness of internal controls over
financial reporting. The GAC also received helpful benchmarking information from EY during the
course of the year and in particular relating to the accounting treatment of the impacts of the
COVID-19 pandemic. The Committee received all communications from EY required by UK
auditing standards, SEC and NYSE rules, including 2020 audit quality and transparency reports.
Audit Plan and fees – The GAC considered EY’s 2020 plan and thereafter discussed the impact of
the COVID-19 pandemic on the external audit. In line with the authority granted to the Committee
by shareholders at the 2020 Annual General Meeting (AGM) to fix the remuneration of the
External Auditor, the GAC approved the 2020 audit fees including the fee for the 2020 interim
results. The Committee received confirmation from the external auditor that the fees were
appropriate to enable delivery of the required procedures to a high quality.
Annual Evaluation – An internal evaluation was carried out at the GAC’s request to assess the
independence and objectivity of the External Auditor and the effectiveness of the audit process
during 2020. The GAC members, attendees, Finance Directors of customer businesses and
functions and key members of the Finance team were consulted as part of the evaluation. The
process assessed the external auditor’s mindset and culture, skills, character and knowledge,
quality control and judgement. The evaluation found that the External Auditor was operating
effectively and with objectivity. Certain areas for consideration to further strengthen effectiveness
were suggested including making greater use of industry knowledge and benchmarking, seeking
to reduce the length of formal reports and being more vocal at audit committee meetings.
Following the evaluation, the GAC recommended that the Board seek the reappointment of EY as
external auditor at the next AGM.
FCA Client Asset Rule Opinions – During 2020 the external auditor presented the results of its
assurance procedures on compliance with the FCA’s Client Asset Rules for NatWest Group’s
regulated legal entities for the year ended 31 December 2019. The GAC also considered the
CASS Audit plan for 2020, the findings of which will be reported to the GAC once the audit is
complete.
External Auditor Report to the PRA – The GAC considered the outcome of EY’s written auditor
report to the PRA under supervisory statement SS1/16 for the year ended 2019, noting that the
matters identified were already being addressed by management.
Audit Partner – Mr Bourne has been EY’s lead audit partner for NatWest Group since the 2016
year-end and will rotate off the audit after the publication of the 2020 financial results. He will be
succeeded by Micha Missakian and in preparation for this there has been a transition period in
which Micha has observed GAC meetings and met with members of the Committee and
management.
The GAC reviews and approves NatWest Group’s non-audit services policy at least annually.
Under the policy, audit related services and permitted non-audit service engagements may be
approved by the Chief Financial Officer up to certain financial thresholds. Engagements in excess
of these limits require the approval of the GAC chairman. Where the fee for a non-audit service
engagement is expected to exceed £100,000, a competitive tender process must be held and
approval of all GAC members is required. The policy permits the External Auditor to undertake
engagements which are required by law or regulation or which relate to the provision of comfort
letters in respect of debt issuances by the NatWest Group, provided prior approvals are in place in
accordance with the policy. The policy also allows NatWest Group to receive services from EY
which result from a customer’s banking relationship, provided prior approvals are in place in
accordance with the policy. All such approvals are reported to the GAC bi-annually. During 2020,
approval was granted under the policy for the external auditors to undertake one significant
engagement which related to a review of regulatory reporting. The GAC was satisfied that the
engagement did not impact the External Auditor’s independence. Further details of the non-audit
services policy can be found on natwestgroup.com. Information on fees paid in respect of audit
and non-audit services carried out by the External Auditor can be found in Note 6 to the
consolidated accounts.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
111
Report of the Group Board Risk Committee
2020 has been an unprecedented period and
BRC has amended its focus to ensure
appropriate oversight of the management and
mitigation of risks driven by COVID-19 whilst
continuing to have oversight of the wider risk
agenda. The cancellation of prescribed
regulatory stress tests and a decision by the
Regulator to delay certain other regulatory
programmes ensured sufficient focus by BRC
on key risk areas throughout the pandemic.
This has included the control environment,
operational risk and resilience, financial crime,
fraud, incident management decisions
impacting risk appetite, and the non-financial
risks associated with the Government lending
schemes and additional support measures.
Further information on all the key topics
considered by the Committee during the year
is provided on the following pages. Part of the
BRC’s role is to review reports and regulatory
submissions on behalf of the Board and
recommend them for approval. Where this is
the case, the report on the following pages is
annotated with an asterisk (*).
COVID-19 headwinds will dominate our
operating environment for some time, and I
anticipate this will impact much of BRC’s work
in 2021. BRC will also continue to focus on
financial crime and the delivery of regulatory
programmes due in 2021 (LIBOR transition
and the Resolvability Self-Assessment) and
regulatory stress tests (including the biennial
exploratory scenario on the financial risks
from climate and the 2021 Solvency Stress
Test).
2020 has been an extraordinary year and I
would like to thank my fellow Committee
members for their continued commitment,
support and challenge throughout the year.
Morten Friis
Chairman of the Group Board Risk Committee
19 February 2021
Meetings and visits
There were eight scheduled meetings of the
Committee held in 2020. In addition, three ad
hoc meetings were arranged to consider time
critical matters such as capital distributions
and the impact of COVID-19 on NatWest
Group’s risk profile. Meetings have been held
virtually throughout the pandemic. Details of
meeting attendance can be found on page
100.
As in previous years, during 2020, members
of the Committee undertook a programme of
visits to the Risk, Internal Audit and Finance
functions, in conjunction with members of the
Group Audit Committee. The Committee also
held in-depth meetings on risk reporting.
Again, all these meeting were held virtually
during 2020.
Performance Evaluation
The annual review of the effectiveness of the
Board and its senior Committees, including
BRC, was conducted internally in 2020.
The Committee held a dedicated session to
discuss its performance. The session was
structured around a number of themes:
operating rhythm; focus and priorities;
effectiveness; and culture and dynamics. The
Committee considered that it continued to
operate effectively and identified some areas
for potential enhancement. In 2021, there will
be focus on streamlining and simplification of
the Committee through prioritisation; reduction
in volume of papers and length of meetings;
improvement in paper quality; and an
inclusive culture at meetings. The Committee
will track progress during 2021.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Letter from Morten Friis
Chairman of the Group Board Risk
Committee
“BRC has amended its focus
during 2020 to ensure appropriate
oversight of the management and
mitigation of risks driven by
COVID-19.”
Dear Shareholder
I am delighted to present my first report as
Chairman of the Board Risk Committee (the
Committee or BRC), a role which I assumed
on 1 August 2020. I would like to thank
Baroness Noakes for her diligence and
dedication throughout her tenure as Chairman
of the BRC, for which we are very grateful.
I am also pleased to welcome Lena Wilson as
a member of BRC. She joined the Committee
in August 2020.
The BRC has an important role in supporting
the Board and overseeing the management of
risk, and this report describes how the
Committee fulfilled this responsibility during
2020. More detail on the remit of the
Committee can also be found in its terms of
reference which are reviewed annually and
available at natwestgroup.com.
Membership
BRC comprises four independent non-
executive directors. The details of the
members and their skills and experience are
set out on pages 97 to 98.
Patrick Flynn is chairman of the Group Audit
Committee of which Robert Gillespie and I are
also members. Robert is also chairman of the
Group Performance and Remuneration
Committee (RemCo) and Lena Wilson sits on
this Committee. This common membership
across Committees helps to ensure effective
governance across the committees.
Regular attendees at BRC meetings include:
the Group Chairman, Group CEO, Group
CFO, Group Chief Risk Officer, Group Chief
Legal Officer and General Counsel, Group
Chief Audit Executive, and the External
Auditor. External advice is sought by the
Committee where appropriate.
Two non-executive directors of NWH Ltd (the
ring-fenced bank) attended Committee
meetings as observers in their capacity as
members of NWH Ltd’s BRC. Meetings of the
Group and NWH Ltd’s BRCs share much of a
common agenda and are generally run in
parallel.
NatWest Group Annual Report and Accounts 2020
112
Report of the Group Board Risk Committee
Key matters considered by the Committee in 2020
Matter
Context of discussion
How the Committee addressed the matter
Risk profile
and reporting
Time was spent at
every BRC meeting
reviewing NatWest
Group’s current and
future risk profile
relative to risk
appetite, with a
particular focus on
COVID-19 impacts,
and scrutinising
management’s
actions to monitor
and control
exposures.
Recovery
and
Resolution
BRC monitors and
challenges the
development of plans
which would allow
NatWest Group to be
dealt with effectively
in the event of
financial failure.
Stress
testing
BRC devoted
considerable time to
stress testing,
challenging and
scrutinising the
outputs.
Risk
frameworks
BRC has continued
its key role in the
review of the
implementation of the
Enterprise Wide Risk
Management
Framework and
oversight of the Risk
Appetite Framework.
Risk Management Reports – The Committee considered detailed analysis on NatWest Group’s risk
profile, including the UK and global economic outlook, top and emerging risks and threats, and
NatWest Group’s performance against risk appetite, at each of its meetings via Risk Management
Reports. As the COVID-19 pandemic evolved, this was supplemented in H1 2020 by additional risk
reporting focussed specifically on the impact of the pandemic on NatWest Group, and
management’s response to the crisis. Reporting and discussion included coverage of NatWest
Group’s treatment of its customers and colleagues (with a particular focus on operationalisation of
COVID-19-related UK Government lending schemes and management of capital repayment
holidays), management of key credit, conduct and operational resilience risks, prioritisation and risk
appetite decisions, and impacts of the pandemic upon the change portfolio, including regulatory
forbearance. Reports on legal and regulatory developments and litigation risks were also frequently
considered.
Updates from Executive and Subsidiary Risk Committees – Regular updates were received from
the Executive Risk Committee, covering management’s oversight of risk. In H1 2020, in response
to the COVID-19 pandemic, management met with increased frequency to ensure effective
management of the impacts of the pandemic on NatWest Group and associated actions and
controls. Where appropriate, BRC received additional reporting from these meetings. In addition,
quarterly reports were received from the chairmen of the risk committees of the segments and
material regulated subsidiaries.
Risk Function – Oversight of the Risk function has been an area of focus, with the Committee
receiving updates on changes to the organisational structure and work being undertaken to
optimise the operating model and enhance effectiveness.
Recovery and Resolution – BRC continued to receive updates on the progress and status of the
NatWest Group resolution planning programme, including compliance with the Operational
Continuity in Resolution (OCiR) requirements, and work being undertaken to enhance adequacy
and effectiveness testing. In 2020, management commissioned a strategic review of Internal
Service Management and ensured that identified areas for improvement in relation to the OCiR
framework were incorporated, to ensure full alignment, BRC reviewed the outputs of this exercise
and will keep actions under review. BRC also reviewed management’s approach and progress to
the resolvability self-assessment, including reviewing activity in plan to provide management and
BRC with the requisite assurance prior to regulatory submission in 2021. BRC reviewed planned
enhancements to the NatWest Group recovery plan, based on learnings since the 2019
submission. Due to COVID-19, the next recovery plan submission will be due in 2021.
ICAAPs, ILAAPs and Budget Stress Tests – The BRC considered the budget and stress tests
ahead of review of the results of the ICAAPs and ILAAPs and the reverse stress tests for
NatWest Group, including the material judgements and areas for future enhancement. It was
noted that the tests did not cover NatWest Group’s current and evolving view of COVID-19
implications (due to timing of submission). Management has since continued to update base
economic and stress scenarios as the pandemic has evolved, with oversight by BRC as
appropriate. BRC reviewed an annual update on the stress testing control environment, key
learnings including those related to the COVID-19 pandemic, and recent and imminent
outcomes from NatWest Group’s investment in stress testing capability. The Committee also
kept under review changes to the stress testing operating model and related work to
strengthen and validate models and improve supporting governance.
Bank of England Stress Tests – The 2020 Bank of England Annual Cyclical Scenario and
climate change Biennial Exploratory Scenario stress tests were cancelled following the COVID-
19 pandemic.
Risk Management Framework – The development of the Enterprise Wide Risk Management
Framework in 2019 was intended to help ensure consistent, efficient and effective risk
management across NatWest Group. During 2020, BRC has continued its oversight of the
implementation and embedding of the framework.
Risk Appetite Framework - During 2020 BRC reviewed the Risk Appetite Framework and
considered the methodologies used to calibrate and align limits and triggers across key risks with
the aim of enhancing the quality of the framework and ensuring the integrity of the overall approach
to Risk Appetite *. The Committee considered the planned enhancements for Risk Appetite
Measures during 2021. *In accordance with the framework, the Committee continued to review
escalated breaches of risk appetite together with the action taken by management in response.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
113
Report of the Group Board Risk Committee
Matter
Context of discussion
How the Committee addressed the matter
Control
environment
BRC continued its
oversight of NatWest
Group’s control
environment,
focusing on the
impact of COVID-19,
major change
programmes and
strategic initiatives.
Transformation – BRC considered progress on the delivery of NatWest Group’s transformation and
change programme and its position relative to risk appetite, including investment prioritisation and
assessment of the impacts of COVID-19 and associated regulatory forbearance, on the portfolio.
BRC placed particular attention on General Data Protection Regulation (GDPR) compliance,
payment systems resilience, and work being undertaken to enhance models to meet European
Banking Authority (EBA) standards.
LIBOR Transition – BRC received reports on NatWest Group’s plans and preparedness for LIBOR
transition to new risk-free rates. Consideration was given to the re-plan of LIBOR transition factoring
in the impact of COVID-19, and steps being taken by management to assess and quantify potential
conduct, litigation and other key risks and drive mitigating actions.
Control Environment Certification and oversight – The Committee was provided with updates
regarding the control environment ratings of the franchises, functions, Services and legal entities.
The Committee considered the impact of crisis management decisions made in response to the
COVID-19 crisis on the control environment and measures which had been put in place to ensure
that the business could continue to operate safely whilst supporting customers. For 2020, the control
environment rating across NatWest Group remained a 3, meaning the required target was not
attained.
Risk Culture – BRC considered the outcome of an externally facilitated exercise to benchmark
progress against NatWest Group’s internal assessment of risk culture, noting areas of strength and
actions underway to address issues identified and maximise opportunities, including realignment of
a broader culture strategy to NatWest Group’s refreshed Purpose. Subsequently, management
reported to the Committee on the new strategic workstream that has been established to link
Purpose and Culture and drive a bank-wide holistic approach to culture development, including risk
culture.
Group-wide
risks
Regular monitoring of
key risks is a pivotal
part of BRC’s role
both via routine risk
reporting and via
regular focused
reports.
Capital and Liquidity –In addition to reviewing the NatWest Group and NWH Ltd ICAAPS* and
ILAAPs* as outlined above, BRC carefully monitored the impacts of COVID-19 upon NatWest
Group’s capital and liquidity position. BRC received reports on NatWest Group’s approach to
capital, liquidity and funding management and risk appetite targets, including double leverage
implications and considered the risks associated with capital distribution proposals in advance of
Board consideration.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Financial crime – Management and oversight of financial crime risk continues to be a key priority
of NatWest Group. NatWest Group’s programme to improve and remediate customer due
diligence standards and build sustainable processes and controls for the future remains ongoing.
BRC received regular updates, including on impacts of the COVID-19 pandemic on progress;
revision of the management operating model to provide enhanced focus and oversight; and the
return to appetite plan. BRC received reports on the new Enterprise-Wide Financial Crime Risk
Assessment process launched in 2020, designed to provide a more dynamic and insightful
understanding of financial crime risk profile, and considered the outputs of the first exercise. BRC
also reviewed the annual Group Money Laundering Reporting Officer’s Report* and considered
risk appetite metrics and performance relative thereto.
Operational risk, resilience and cyber security – BRC received regular updates on NatWest
Group’s operational risk profile and risk appetite, with a particular focus on resilience through
COVID-19, outsourcing, information and change. The Committee considered the bank’s
preparation for external regulatory developments in relation to operational resilience and an
assessment of preparedness for certain scenarios relating to interconnected risks. In addition,
separate updates on information security were reviewed and BRC dedicated time to the
consideration of cyber risk, the external threat landscape, and action being taken by management
in response. Reports were also received in relation to NatWest Group’s payments risk and control
environment and fraud.
Conduct and regulatory compliance risk – BRC reviewed conduct risk profile, including impacts of
the COVID-19 pandemic and activity underway to improve performance relative to risk appetite.
Similarly, it reviewed the regulatory compliance risk profile, including compliance with current
regulatory requirements, identification and management of regulatory breaches, and plans to
achieve compliance with future regulatory requirements. In particular, BRC oversaw
management’s progress in demonstrating compliance with and embedding into business as usual
of UK ring-fencing rules and completion of required remediation activity.
Credit and Market risk – In addition to reporting on credit and market risk, with a particular focus
on COVID-19 impacts, specific updates were received in relation to the non-financial risks
associated with COVID-19 Government lending scheme products and additional support
measures, including associated controls and assurance testing. BRC also reviewed separate
reports on the retail and wholesale credit risk portfolios, which provided the Committee with insight
to the portfolio profile, including asset quality, risk management approach and risk appetite.
NatWest Group Annual Report and Accounts 2020
114
Report of the Group Board Risk Committee
Matter
Context of discussion
How the Committee addressed the matter
Group-wide
risks
Regular monitoring of
key risks is a pivotal
part of BRC’s role
both via routine risk
reporting and via
regular focused
reports.
Model risk management – Models remain fundamental to NatWest Group’s risk management
processes and stress testing capability and BRC dedicated time to reviewing progress made by
management to deliver improvements to model risk policy and governance. BRC received updates
on model risk appetite, the model risk profile and future model risk management enhancements
required to ensure the risk can be managed within appetite, noting future model risk challenges
which will impact the risk profile from 2020 onwards.
Data Management and GDPR - BRC received reports on data management risk profile, including
the risk implications of proposed data strategy changes, required to support NatWest Group’s
refreshed Purpose-led strategy. BRC considered management’s plans to enhance data
management and capability, including updates on the use artificial intelligence and machine
learning. The Committee also received regular updates on compliance with GDPR and BCBS239,
including the impact of COVID-19 on progress.
Financial Risk from climate change – The Committee reviewed NatWest Group’s progress relating
to the management of the financial and non-financial risks arising from climate change, including
progress made against regulatory commitments.
Accountability – The Committee regularly considered developments in significant material events
and investigations. This included resultant accountability recommendations, with the Committee
having the ability to advise RemCo on any concerns as to the appropriateness of the
recommendations from a risk perspective.
Remuneration – The risk and control goals of members and attendees of the NatWest Group
Executive Committee (ExCo) were reviewed, with additional focus on underlying objectives for the
Group Chief Risk Officer. In addition, the Committee reviewed the risk management performance
and Long-Term Incentive performance conditions, pre-grant and pre-vest assessments for ExCo,
ensuring fair reflection of risk management performance in award and vesting outcomes. More
generally, the Committee made recommendations to RemCo on the NatWest Group bonus
calculation, ensuring appropriate consideration of risk management performance. Further detail on
how risk is taken into account in remuneration decisions can be found in the Report of RemCo
from page 119.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Accountability
and
remuneration
BRC continued to
provide oversight
over the risk
dimension of
performance and
remuneration
arrangements,
working closely with
RemCo.
NatWest Group Annual Report and Accounts 2020
115
Report of the Group Sustainable Banking Committee
Letter from Mike Rogers
Chairman of the Group Sustainable
Banking Committee
“The Committee has played a key
role in supporting the Board in the
organisation’s purpose-led
journey”
Dear Shareholder,
I am pleased to present my third report as
Chairman of the Group Sustainable Banking
Committee (the Committee or SBC).
Purpose Pillars
This year, it was agreed that the Committee’s
remit would be amended to focus on NatWest
Group’s new Purpose framework and
priorities, launched in February 2020 given
their strategic importance. While the Board
retains ownership of the overall strategic and
purposeful direction, it was agreed that the
Committee would oversee progress towards
achieving NatWest Group’s purposeful
commitments and ambitions on behalf of the
Board.
The refreshed pillars of sustainable banking
for 2020 focussed on: Learning & Capability;
Climate; Enterprise; Conduct & Ethics; and,
People & Culture. This Purpose-focus
informed our meeting structure and proved
helpful in prioritising matters for which the
Committee felt oversight and challenge, on
behalf of the Board, was most valuable.
In response to the COVID-19 pandemic, the
April meeting of the Committee was re-
purposed from Learning & Capability to focus
on our response to the crisis and our
treatment of customers.
The Committee’s stakeholder engagement
model involves integrated engagement
sessions aligned to our pillars of sustainable
banking and seeks to bring internal and
external voices and challenging perspectives
into the boardroom. We will continue to keep
SBC’s focus and responsibilities under review.
Driving the Sustainable banking agenda
Sustainable banking and stakeholder
engagement remain of vital importance as
NatWest Group continues its transition to
becoming purpose-led.
With shareholder, regulatory and societal
expectations intensifying, embedding
sustainable banking principles and targets
within NatWest Group’s broader strategic
agenda will be critical. By continuing the
Committee’s focus beyond traditional
environmental, social and governance (ESG)
matters we have sought to ensure that the
SBC continues to play a forward-looking role.
As a Committee we have continued to be
reassured by the energy shown by colleagues
across the organisation in driving the
sustainable banking agenda.
2020 Highlights
I am pleased to report that the Committee
believe they have played a key role in
supporting the Board in the organisation’s
purpose-led journey, with the Committee
benefitting from focussed discussion on
matters such as Climate, Enterprise and our
People & Culture.
Below are the key discussion points and
outcomes from the year:
COVID-19 & Customer Treatment
The Committee considered how the bank
was approaching customer treatment in
response to the COVID-19 pandemic.
Key topics debated included the
organisational response, franchise specific
updates from Retail Banking and
Commercial Banking, conduct
implications, potential future areas of focus
and ensuring that our response was
aligned to our Purpose.
This topic has continued to be re-visited,
with particular updates on the COVID-19
response in our Retail, Commercial and
Private Banking teams. The sessions
provided insights into the ongoing support
being provided to customers and plans for
continued support as the pandemic’s
impact on the economy progresses.
Climate
The Committee met to consider how we
become a leading bank driving the UK’s
transition to a low carbon economy, while
also tracking broader ESG progress.
Topics included progress against the
climate risk agenda, future areas of focus
and an update on progress against
expectations in the UN Principles of
Responsible Banking.
Areas of debate and challenge included
climate innovation, peer comparisons and
industry collaboration, as well as the
approach to disclosure. The Committee
also received a further detailed update on
best-in-class climate change action among
European banks.
We benefitted from external perspective
provided by the Green Finance Institute
who provided an overview of the relevant
science, climate modelling and the case to
de-carbonise.
Enterprise
The Committee has spent time
understanding how the bank is
approaching becoming the Champion of
UK business and removing barriers to
ensure everyone has the same opportunity
to progress.
Against notable disruption of the sector as
a result of COVID-19, the Committee
sought updates from management on the
support being provided to customers and
progress against our targets in this area.
We discussed opportunities to support our
customers across the Retail, Commercial
and Private Banking areas, and some of
the positive ways the organisation had
pivoted to support Enterprise given the
challenging climate, including via the
Business Builder and Accelerator
programmes.
External insights from customers were
shared with the Committee via recorded
customer testimonies and a presentation
by one of our Enterprise customers.
Conduct & Ethics
The Committee considered certain aspects
of NatWest Group’s decision-making
framework to support its oversight of the
safety and soundness of NatWest Group’s
commercial decisions. This included
spotlights on Ethical Conduct by
Colleagues and the new internal ‘Yes
Check’. It also considered NatWest
Group’s Modern Slavery and Human
Rights obligations within the business and
supply chain in support of discussion on
the organisation’s role in shaping societal
responses to these challenges.
Areas of focus included measurement of
the impact of the updated colleague
framework and support, the introduction of
a Supplier Charter and the extent of
NatWest Group’s responsibilities in
relation to Modern Slavery and Human
Rights.
We benefitted from the external
perspectives provided by a speaker from
Blueprint for Better Business who shared
insights and challenges in relation to ethics
and the interplay between organisational
ethics and Purpose.
People & Culture
The Committee, on behalf of the Board,
debated how NatWest Group builds an
engaged workforce and healthy culture for
the future, given the importance of both in
supporting NatWest Group’s Purpose.
The Committee noted management
updates on progress and plans to embed
culture, particularly given the impact of the
COVID-19 pandemic on colleagues.
Further to the Committee discussion,
management provided additional peer
comparison information to Members in
support of the Committee’s role in
overseeing Culture.
The Committee was provided with a
Culture Measurement Report providing
insights to understand the status of culture
across NatWest Group. The report now
follows the ‘Five principles of a purpose
driven business’ model and uses Banking
Standards Board (BSB) survey results,
culture measures, inclusion and wellbeing
data. It was noted that there had been
some improvement in BSB survey results
year-on-year and the Committee
acknowledged that progress had been
made across culture dimensions in 2020
despite the challenges of the global
pandemic.
The Committee, on behalf of the Board,
considered workforce policies and
practices to ensure they are consistent
with NatWest Group’s values and support
long-term sustainable success. In
particular, the Committee reviewed the fair
pay charter, and received updates on pay
gap reporting and the 5-year inclusion and
diversity update report.
NatWest Group Annual Report and Accounts 2020
116
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Report of the Group Sustainable Banking Committee
Membership, Meetings and Escalation
Robert Gillespie stepped down from his role
on the SBC with effect from 31 July 2020.
Thereafter, the Group SBC membership
comprised three non-executive directors as
members and two non-executive directors
from our ring-fenced bank board observing,
along with management attendees. More
details of membership and attendance at
meetings can be found on page 100 of the
Corporate governance report.
Meetings and escalation mechanisms have
not changed since last year’s report. In many
cases the Committee and the Sustainable
Banking Committee of NatWest Holdings
Limited met concurrently.
Authority is delegated to Group SBC by the
Board and a regular report of the Committee’s
activities is provided. The terms of reference
are available on natwestgroup.com and these
are reviewed annually and approved by the
Board.
Performance evaluation
The annual review of the effectiveness of the
Board and its senior Committees was
conducted internally in 2020. Overall, the
feedback on the Committee was positive and
it was agreed that the Committee was
operating in accordance with its terms of
reference.
2021 presents challenges and opportunities
for the sustainable banking agenda as it
builds on the progress achieved in 2020 and
seeks to support the recovery post-2020. I am
looking forward to steering future SBC
discussions in such an important area for
NatWest Group’s strategy and to reporting on
progress next year.
Areas of focus for 2021 will be to continue to
oversee the embedding of Purpose across
NatWest Group, consider focus on Customer
Service & Experience at the Committee, and
ensure appropriate challenge from external
speakers.
Conclusion
In this first year of supporting the embedding
of our Purpose, my fellow directors and I have
had the opportunity to help shape and
oversee NatWest Group’s future sustainable
banking strategy and response to these
important issues in the context of a
challenging year. I want to take the
opportunity to thank the Committee members,
attendees and presenters for their continued
contribution and support in 2020.
Mike Rogers
Chairman of the Group Sustainable Banking
Committee
19 February 2021
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
117
Report of the Technology and Innovation Committee
Letter from Yasmin Jetha
Chairman of the Technology and
Innovation Committee
“Technology and innovation are
enabling fundamental shifts in the
way financial services are
delivered. The Committee has had
oversight of actions being taken
to transform capabilities across
the bank.”
Dear Shareholder,
I am delighted to present my first report as
Chairman of the Technology and Innovation
Committee (the Committee or TIC).
Role and responsibilities
During this unprecedented year, TIC has
continued to support the Board in overseeing,
monitoring and challenging the actions being
taken by management in relation to
technology and innovation and in doing so
giving due consideration to NatWest Group’s
purpose.
Authority is delegated to TIC by the Board and
a regular report of the Committee’s activities
is provided to the Board. The terms of
reference are available on natwestgroup.com.
These are reviewed annually and approved by
the NatWest Group Board.
Principal activity during 2020
During 2020, TIC priorities were reset to focus
on the following key themes:
Digitising the Core – TIC has considered
actions being taken in relation to existing
technology to enhance customer and
colleague experience and improve the
resilience of IT systems.
COVID-19 resulted in NatWest Group having
to respond quickly to support colleagues and
customers and ensure seamless
uninterrupted delivery of all services.
The Committee considered how technology
has been an enabler throughout the pandemic
and how previous investment in the portfolio
allowed NatWest Group to react at pace. This
included actions taken to allow colleagues
globally to work from home where
appropriate, and customers to bank safely
remotely as well as use data and analytics
capabilities to allow NatWest Group to support
the Government Loan Schemes, mortgage
repayment holidays and loan deferrals.
It also highlighted how NatWest Group could
collaborate as one-team to deliver digital
enhancements, automated solutions and
critical changes at pace for customers.
NatWest Group’s cloud strategy provides
capabilities to support customers and
colleagues. TIC discussed the continued
development, adoption and practical
implementation of the cloud strategy and
cloud technologies. It also considered the
potential future use and opportunities
presented by cloud.
Future Ready – Technology and innovation
are enabling fundamental shifts in the way
financial services are delivered. This has been
significantly accelerated due to COVID-19.
TIC has had oversight of actions being taken
to transform data and technology capabilities
and deploy ‘forward-looking’ technology
across the bank. It has received updates on
the implementation of the One-Bank
technology transformation strategy, which
includes the consolidation of services and
creation of centres of excellence. The
Committee considered how technology
services are provided from NWH to NatWest
Markets and steps being taken to improve
NatWest Group’s long-term data capabilities.
Collaboration – TIC considered
management’s new approach to the operating
model overseeing innovation, partnerships
and ventures. The framework will provide
oversight across NatWest Group, driving
alignment and a One-Bank approach. It will
promote customer focussed innovation and
partnerships and build on the innovation
ecosystem that has been established.
Ventures – to continue the bank’s journey to
introduce new and innovative customer
solutions, TIC considered the strategic options
to deliver a digital bank. This included the
viability assessment for Mettle (our digital
banking proposition for small businesses to
combine their current account with invoicing,
payment chasing and bookkeeping
capabilities) and Bó, (our digital bank pilot)
and lessons learnt following the decision to
close Bó.
Innovation – TIC has continued to oversee the
development and delivery of NatWest Group’s
innovation approach supporting NatWest
Group’s long-term strategic priorities. This
included an overview of innovation activity
underway from seed to scale and how
innovation activity aligns to the bank’s broader
purpose and strategy. The Committee also
considered innovation investment prioritisation
and how this has been informed. From a
macro perspective, the Committee discussed
top technology trends across the industry and
areas which had been most impacted by the
COVID-19 crisis and considered how NatWest
Group might respond to these.
TIC also considered emerging skills,
capabilities and technologies critical to future
success such as data management, greater
use of cloud and increased opportunities to
partner.
External Insights
Obtaining an external view of the industry,
external trends, developments and competitor
activity has been valuable to the Committee. It
allows the Committee to better understand
both opportunities and emerging threats from
continued market disruption.
During 2020, Michael Dell (Dell Technologies
Inc.) joined the Committee and provided his
views on external trends and challenges,
including innovation priorities and the
technology advances accelerated by COVID-
19. Astro Teller, CEO and Captain of
Moonshots of Alphabet's Google X, joined the
Committee to share more about Google X and
his perspectives on emerging and disruptive
technologies.
NatWest Group Annual Report and Accounts 2020
118
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Membership and meetings
Following Alison Davis’ departure from the
Board on 31 March 2020, the Committee is
comprised of three non-executive Director
members; Frank Dangeard, Patrick Flynn and
myself. More details of membership and
attendance at meetings can be found on page
100 of the Corporate governance report.
The Committee is supported by management
and the CEO, Chief Administration Officer,
Chief Risk Officer, CFO, Director of
Innovation, Director of Strategy & Corporate
Development and Chief Technology Officer
are all standing attendees.
The Committee held three scheduled
meetings during 2020. An ad hoc meeting
was also convened to consider the viability
assessment of the Mettle and Bó propositions.
All meetings were convened virtually. Details
of meeting attendance can be found on page
100 of the Corporate governance report.
Performance evaluation
The Committee held a dedicated session to
discuss its performance. The session was
structured around themes, including
effectiveness; focus and priorities; operating
rhythm; and escalation. The Committee
considered that it continued to operate
effectively and act in accordance with its
terms of reference. It agreed that in the
coming year it would focus on digitisation of
the core; transformation of data and
technology capabilities; and ventures,
partnerships and innovation. There would be
deep dives on specific topics to support more
focussed discussion.
The Committee will track progress on the
outcomes of the evaluation during 2021.
Conclusion
I am delighted to chair this Committee as it
continues to support the Board in an area
critical to the bank’s future strategy.
Together with my fellow directors, we will
retain our focus on monitoring the future
technology and innovation landscape and its
impact on NatWest Group. The Committee
will continue to shape opportunities arising
from management’s response to both threats
and opportunities that align with NatWest
Group’s purpose.
I want to take the opportunity to thank the
Committee members and attendees for their
direction, enthusiasm and support in 2020. In
particular, I would like to thank Alison Davis,
my predecessor, for chairing the Committee
since it was established in 2017. Her strong
technology and innovation knowledge and
experience provided great benefit to the
Committee throughout her tenure. I would
also like to thank Lena Wilson who stepped
down from the Committee in March 2020.
Yasmin Jetha
Chairman of the Technology & Innovation
Committee
19 February 2021
Directors’ remuneration report
Chairman’s letter
Approach to executive director
and wider workforce remuneration
Annual report on remuneration
Other remuneration disclosures
Page
119
124
133
147
Letter from Robert Gillespie
Chairman of the Group Performance and
Remuneration Committee
Dear Shareholder,
This is my fourth report as Chairman of the
Group Performance and Remuneration
Committee (the Committee). It has been a
year unlike any other in living memory. As a
result, I felt that it was particularly important
as part of my letter this year to not only share
a summary of the key activities and decisions,
but to add some colour on our thinking and
our approach to balancing the varied
considerations of an unprecedented year.
Setting the scene
The Committee is acutely aware of the
significant adverse impact that the COVID-19
pandemic has had on our customers, our
stakeholders, including our shareholders, and
broader society. This has significantly
influenced our decisions this year.
At the start of the pandemic, Alison Rose,
CEO and Howard Davies, our Chairman, felt
the need to send clear leadership messages
to all stakeholders in order to signify that
NatWest Group was aware of the need to
demonstrate responsibility, even though the
magnitude of events relating to COVID-19
was unclear at the time. Accordingly, Ms Rose
decided to forgo 25% of her fixed pay for the
rest of the year with NatWest Group making a
comparable donation to the National
Emergencies Trust (NET) Coronavirus Appeal
and the Chairman made a similar commitment
to donate 25% of his fees for the rest of the
year. Ms Rose also indicated she did not wish
to receive a variable pay award for 2020. The
Committee is grateful for the clear leadership
given by the Chairman and CEO through
these actions.
The challenge for the Committee, as we now
look back on 2020, lies in striking an
appropriate balance between acknowledging
the macroeconomic environment, but at the
same time addressing the business
imperative of retaining and motivating
colleagues, protecting our franchises and
scarce skill sets, and recognising the
significant efforts of colleagues in delivering
an extremely strong business response to the
pandemic.
Bonus pool for the wider workforce
We recognise that while underlying
performance has been resilient, profitability
and shareholder value have been severely
impacted. Share price performance has
unsurprisingly been highly volatile but not
entirely unexpected given the macroeconomic
environment. Analysis of our share price
shows a clear correlation with that of
competitors over the period, which indicates
share price movements were largely sector
driven, which in turn was a reaction to the
pandemic.
The absence of dividend payments during the
year, in line with guidance from our regulators
in April 2020, will have disappointed ordinary
shareholders. The capital and liquidity of
NatWest Group has remained very strong
through the period. In December 2020, the
PRA eased its restriction on shareholder
capital distributions and the Board has
confirmed its intention to pay a dividend of 3p
per ordinary share in respect of financial year
2020, this being the maximum amount
permitted under the regulations.
Balanced against such factors, the Committee
has been mindful of the role that colleagues
have performed in NatWest Group’s reaction
to the pandemic. Our colleagues have worked
tirelessly, often in difficult circumstances,
demonstrating real resilience and huge
commitment to continue to serve our
customers. They have reacted with speed and
agility to an unprecedented set of
circumstances and have taken a proactive
approach to deliver business support
schemes offered by the Government whilst
taking a careful approach to the management
of risk. The Committee felt it was appropriate
to recognise this exceptional contribution of
our colleagues in serving the needs of
customers during the year.
The pandemic resulted in the majority of
employees working from home, which put an
immense strain on the maintenance of internal
systems in order to allow this to happen
seamlessly and without creating incremental
operational risk. The Committee also felt it
was appropriate to recognise the
extraordinary efforts to achieve this outcome.
NatWest Group has not benefitted from any
direct government support although it is
acknowledged that government intervention to
support the economy has mitigated some of
the risks resulting from the pandemic.
NatWest Group has also taken steps to
protect all its employees. It decided that no
colleagues should be furloughed, it protected
pay for six months, including for those
colleagues unable to work during this period,
and implemented a broad range of initiatives
to provide practical and emotional support.
This is explained in further detail in this report.
Having regard to all the matters set out above,
the Committee has considered carefully a
spectrum of compensation outcomes,
including the possibility of no bonus
payments. The Committee has concluded,
weighing up all the relevant factors, it is
appropriate to deliver variable pay for this
year at a significantly moderated level in
comparison to prior years.
In reaching its decision to pay a bonus pool to
the wider workforce, the Committee has relied
on a multi-step process in order to assess
performance and balance this against relevant
external factors. We believe that proceeding
with a significantly reduced bonus pool
demonstrates the restraint and caution
expected by our shareholders and regulators,
yet still offers a fair level of reward for
colleagues in recognition of their performance
in exceptional circumstances.
The agreed bonus pool is £206 million, which
is down 33% on 2019. The Committee feels
this is appropriate to reflect NatWest Group’s
business mix and the varied performance of
its business units during the year. The vast
majority of the pool will be allocated to
revenue-generating business units and the
teams which were pivotal in enabling
colleagues to seamlessly work from home
during the pandemic. Immediate cash
bonuses continue to be limited to £2,000.
Long-term incentive (LTI) awards
Turning to LTI awards, the Committee
decided early in the year not to make any
adjustment to performance targets for 2020 as
a result of the pandemic. These targets
formed the basis of the pre-grant assessment
for LTI awards to be granted in 2021.
The 2021 LTI awards proposed have been
adjusted with reference to performance over
2020 and have also been subjected to a
further reduction of an amount greater than
the overall reduction to the bonus pool, in
order to reinforce the ‘one bank’ approach
underpinning senior leadership at NatWest
Group.
Overall, the Committee believes the approach
we have taken on LTI awards demonstrates
restraint on executive pay whilst still paying
fairly for the role performed.
Executive director pay policy
The policy was renewed at the AGM in April
2020 for another three years with over 90% of
votes in favour. The Committee believes the
policy is continuing to work well. It incentivises
executive management in a manner that is
easily understood and demonstrates to the
wider workforce that we are following a
restrained but fair approach within a culture of
prudent risk-taking.
Variable pay for executive directors is
delivered entirely in shares with no annual
bonus. The main performance test takes
place before granting the LTI award with a
further assessment prior to vesting to ensure
that the performance has proved to be
sustainable.
Nearly 70% of expected remuneration for our
executive directors is delivered in shares; far
higher than typical market practice. Extensive
deferral and retention periods are in place and
LTI awards are subject to malus and clawback
provisions. Furthermore, our executive
directors are required to acquire substantial
shareholdings which must be retained for two
years post-employment. This creates clear
alignment between the executives and
shareholders, which is one of the main intents
of the remuneration construct.
NatWest Group Annual Report and Accounts 2020
119
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Directors’ remuneration report
An assessment of performance against the
pre-set and unadjusted 2020 performance
targets resulted in a recommended LTI award
level of £1,450,000, or 75% of Ms Rose’s
maximum LTI award level. This grant was
then subject to an overall pay restraint
reduction of 38% to reflect the impact of
COVID-19, resulting in a notional LTI award of
£899,000 for Ms Rose, or 47% of her
maximum LTI award level. Ms Rose had
already indicated that she did not wish to
accept an LTI award for this year and
accordingly no award will be made.
Katie Murray
Ms Murray’s fixed pay remained unchanged
during 2020. Ms Murray’s performance was
assessed against the same core goals that
applied to Ms Rose. The performance of the
Finance function was also taken into account.
The Committee agreed that Ms Murray had
performed strongly during 2020. Highlights
included management of crucial parts of the
COVID-19 agenda, especially management of
the capital, liquidity and funding plans, and
delivery of annual cost reductions in line with
target. There had also been improved
management of investor engagement with
positive feedback received. Ms Murray had
also made a significant contribution to
progress on key strategic priorities and had
demonstrated excellent leadership, with good
progress having been made on transforming
the Finance function, its executive team and
its inclusion agenda.
An assessment of performance against the
pre-set and unadjusted 2020 performance
targets resulted in a recommended LTI award
level of £1,100,000, or 73% of Ms Murray’s
maximum LTI award level. This grant was
then subject to an overall pay restraint
reduction of 38% to reflect the impact of
COVID-19, resulting in a LTI award for 2020
of £682,000, or 45% of her maximum LTI
award level.
The impact of these decisions against
maximum levels is shown below.
We recognise that the construct has some
unique features which require explanation.
Engagement with stakeholders, therefore,
continued during 2020.
Some investors highlighted that disclosing
greater detail on the factors leading to LTI
outcomes would be welcomed. As a result,
the pre-grant disclosures in this report for
performance year 2020 have been expanded
with ratings to give an indication of the extent
of over or underperformance against targets. I
hope this enables shareholders to better
understand our deliberations for this year and
in future.
Executive director pay for 2020
Alison Rose
Ms Rose’s salary and pension was
unchanged over the year while her fixed share
allowance (FSA) was reduced from
£1,100,000 to £673,922, as a result of her
decision in April 2020 to forgo 25% of her total
fixed pay for the rest of the year. NatWest
Group made a comparable donation to the
NET Coronavirus Appeal.
While Ms Rose confirmed in April 2020 that
she did not wish to receive a 2021 LTI award,
the Committee was still required to assess her
performance over the year. The Committee
also agreed that, while it did not intend to
grant Ms Rose a 2021 LTI, in line with her
request, it was important to agree a notional
2021 LTI award for her, in order to assist with
future benchmarking.
The Committee agreed that Ms Rose’s first
full year as CEO had been highly impressive.
The effective launch of NatWest Group’s
purpose-led strategy was a particular
highlight. Ms Rose had displayed strong
leadership and energy in helping to navigate
the business through a remarkably
challenging year, with significant progress
having been made on key strategic priorities,
including the implementation of the ‘one bank’
transformation programme and strengthening
her executive team through internal and
external hiring of talent.
Against the pre-set 2020 performance targets,
underlying financial performance was deemed
very respectable, despite the impact of
COVID-19 on full year results, and there had
been progress on customer scores. People
scores performed very strongly in a difficult
year for colleagues and the new climate-
related targets were all met.
Understandably, the enterprise target relating
to the creation of new businesses had not
been achieved due to the pandemic, but a
switch to support existing customers had been
effective with 6.4m interventions aimed at
helping customers survive and thrive
throughout the pandemic having been logged.
The risk control environment was one area
where performance had not improved
sufficiently to meet the target. Full details of
the 2020 performance assessment for
executive directors can be found on page 135
to 138.
NatWest Group Annual Report and Accounts 2020
120
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Executive directors also entitled to benefits in line
with the policy, as detailed later in this report. Had
Ms Rose not indicated that she would not accept an
LTI award for 2020 her total compensation excluding
benefits would have been £2,783,000.
Looking ahead, no changes are proposed to
remuneration levels for executive directors in
2021, while salaries for the wider workforce
will be increased by around 2% on average. In
making increases across the wider workforce,
the majority of the funding is targeted to our
more junior colleagues.
2018 LTI award vesting outcome
Ms Rose received an LTI award in 2018 while
CEO of Commercial & Private Banking. The
pre-grant assessment of performance over
2017 led to a reduction of 13.33% from the
maximum award level. Ms Murray was on a
different remuneration construct at that time
and did not receive a 2018 LTI award.
The Committee undertook the pre-vest
assessment at the end of 2020. It operates as
a ‘look back’ to the performance year for
which the award was made so we can
consider whether anything has come to light
since the grant that would change our original
view of performance. A structured set of
questions and evidence factors were used to
guide discussions on whether we correctly
assessed performance for 2017 and whether
any further adjustment should be made prior
to vesting. From the analysis, three areas
were identified for further investigation
covering share price, customer and risk
performance.
In considering the underperformance of the
share price since 2017, we did not believe this
was due to factors within management’s
reasonable control. The reduction in our share
price showed a clear correlation with other
large UK banks over the period. While
customer NPS had declined in three of the six
areas since 2017, this was primarily due to
management actions in subsequent years and
had been accounted for in adjustments to the
relevant LTI awards. Therefore, we did not
believe any further adjustments were
necessary for these areas.
Directors’ remuneration report
Turning to risk, there had been no decline in
performance but the expected improvement in
the control environment rating had not been
attained in subsequent years as the progress
envisaged on Customer Due Diligence and
associated matters (CDD) had not been
achieved.
As a result, the Group Board Risk Committee
(BRC) recommended that the Committee
consider making a pre-vest adjustment to Ms
Rose’s 2018 LTI award using the Risk &
Control underpin. The Committee was
advised that management had not fully
appreciated the scale and complexity of the
challenges relating to the remediation of CDD
during 2017. While Ms Rose was not primarily
responsible for the 2017 CDD remediation
plan, she had associated responsibility as the
CEO of one of the franchises in which
remediation was required. The Committee
agreed that this should result in a 5% pre-vest
reduction on Ms Rose’s original maximum LTI
award level.
We have also made a pre-vest reduction of
7.5% of maximum to Ross McEwan’s award
in relation to the same issue. The reduction in
Mr McEwan’s 2018 LTI award was greater
than Ms Rose’s as he was considered to have
had supervisory oversight responsibility.
Full details of the pre-vest assessment for
both Ms Rose and Mr McEwan can be found
on page 135.
2018 LTI award to Alison Rose
Granted
Maximum
Shares
Value
564,122
£1.5m
488,906
£1.3m
Shares to
vest
460,700
£0.65m
The £0.65m value reflects both an aggregate
reduction of 18.33% of the maximum LTI award level
for Ms Rose across pre-grant and pre-vest stages
and also the fall in the share price over the
performance period.
While the performance cycle has completed,
the shares from the 2018 LTI award will vest
in tranches up to 2025 and remain subject to
retention and malus and clawback provisions
to ensure recipients maintain a long-term
focus in their decision-making.
Executive pay in a market context
The Committee receives annual updates that
compare executive remuneration at NatWest
Group to a broad peer group, consisting
primarily of UK and overseas-based banks but
also some insurers. A further comparison is
made against the FTSE30. The latest analysis
shows that CEO target total compensation at
NatWest Group remains at the lower quartile
of the FTSE30 and is also at the lower end of
the main UK banks. The position against the
broad peer group is around median.
The CFO is positioned slightly higher against
the market with target total compensation at
median against the FTSE30 but again at the
lower end of the main UK banks. The position
against the broad peer group is above
median.
Approach to windfall gains
This has been a focal point for shareholders in
2020 due to share prices being highly volatile
and we have given the matter a great deal of
thought. Over an executive’s tenure it is likely
that there will be some years where awards
will be granted at times when the share price
appears low compared with the long-run trend
and other times where the opposite will occur.
The key principle here is alignment with
shareholders and our heavily share-based
construct, with shares granted at different
prices over the years, already creates close
symmetry with market movements in either
direction.
The LTI awards granted in March 2020 were
made at a time when the true impact of
COVID-19 was just beginning to emerge. The
share price fell significantly after the grant was
made before recovering some of that ground
by the end of the year. I wrote to our major
shareholders before the AGM confirming that
the Committee would consider any potential
windfall gains prior to vesting and would use
its discretion where appropriate.
After considering a number of options, we
continue to believe that assessing windfall
gains prior to vesting, rather than at grant, is
the optimal time to consider any adjustments.
In order to help guide our judgement in these
circumstances, and to reassure shareholders
that there is rigour involved, a framework has
been implemented to assess whether windfall
gains have arisen over the period from grant
to vest and the factors to consider in making
any adjustments.
For the 2021 LTI award this framework
ensures the following factors are taken into
account:
the level of the grant price in
comparison to pre COVID-19 levels;
the level of share price appreciation (if
any) over the period up to vest;
consideration of whether share price
appreciation was unique to NatWest
Group and indicative of strong
management performance; and
whether any reduction had been
applied to award levels at pre-grant.
On the final point above, as set out earlier in
this letter, the 2021 LTI award levels were
significantly reduced to reflect the impact of
COVID-19. The significant reductions applied
prior to grant will, in line with the framework,
be an important factor in determining whether
any windfall gains have arisen prior to vesting.
Other workforce considerations
Fairness
The Committee continued to review
remuneration arrangements for the wider
workforce during the year and worked closely
with the Sustainable Banking Committee. A
decision was taken to introduce a Fair Pay
Charter for NatWest Group, which is based
around ten key principles and builds on the
existing elements of our fair pay approach.
NatWest Group Annual Report and Accounts 2020
121
It is pleasing to see that the number of
colleagues at NatWest Group who believe
they are paid fairly increased again during
2020, to a level significantly above the Global
Financial Services Norm. In the UK, our rates
of pay continue to exceed the Living Wage
foundation benchmarks. For our major hubs
outside the UK, we continue to pay above the
minimum and Living Wage rates in the
Republic of Ireland as well as exceeding the
minimum wage benchmarks in India and
Poland.
Gender and ethnicity
The Committee considers gender and
ethnicity pay gap metrics to be another
important indicator and full details can be
found in the Strategic report and on
natwestgroup.com. This is the third year that
we have published ethnicity pay gap
information on a voluntary basis. We are
confident that colleagues are paid fairly, and
policies and processes are kept under review
to make sure this continues to be the case.
Financial wellbeing
We also discussed the financial wellbeing of
colleagues. Following a successful campaign
over the last two years, the number of
colleagues saving nothing for life after
work has reduced by 13% and pension
contributions have increased by over £31
million. Colleagues have access to a range of
flexible benefits and in certain jurisdictions
they can choose to join one of our employee
share plans. The Committee agreed to the
extension of our popular Sharesave plan to
Poland and India for the first time.
Engaging with colleagues
I enjoyed attending another meeting with the
Colleague Advisory Panel (CAP) during the
year, which provides direct engagement
between colleagues and Board members. I
provided the CAP with an update on our
approach to executive director remuneration
and how it aligns with the wider company pay
policy. Feedback was positive with members
stating that the principles behind executive
director pay were clear and fair.
In addition to the commitment to maintain
workforce pay at the outset of COVID-19 and
not to place colleagues on furlough, measures
were put in place to enable colleagues to work
safely and productively, including home
working support. A virtual GP service was
also introduced together with a guided suite of
wellbeing programmes to help support mental
health. Steps were also taken to maintain
internships and NatWest Group did not cut
any apprenticeship programmes during 2020.
Looking ahead
NatWest Group will shortly publish an
Environmental, Social and Governance (ESG)
report, to provide additional information on
ESG issues to investors, regulators,
customers, suppliers, colleagues and other
stakeholders. The report will be available on
natwestgroup.com. Along with the Fair Pay
Charter, this provides a further platform for us
to explain how various aspects of wider
workforce remuneration provide a link
between culture, pay and ESG.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Directors’ remuneration report
The Committee has also approved targets for
executive remuneration to support the
updated strategic goals, with new measures
on financial capability and return on equity.
ESG measures form an integral part of our
LTI goals. For 2021, there are targets related
to our climate ambitions as well as supporting
enterprise and building financial capability,
aligned with our purpose.
Response to shareholder feedback
Priority areas have been identified for the first
time to provide increased transparency to
shareholders on the goals considered to be
key deliverables for the year. This is intended
to address stakeholder feedback on the level
of discretion afforded to the Committee under
our LTI construct.
The revised remuneration requirements under
the fifth Capital Requirements Directive (CRD
V) will be another focus for the Committee
during 2021. It will bring about some changes
to remuneration arrangements for Material
Risk Takers, including extending the minimum
deferral period from three to four years for
variable pay awards.
I hope this letter and the rest of the report will
help to explain the Committee’s approach to
pay decisions for the year and why we believe
these strike an appropriate balance. I would
like to thank my fellow Committee members
and all the stakeholders who provided
valuable input during a most challenging and
unusual year and look forward to our
continued engagement in 2021.
Together with the new ratings that have been
introduced to indicate the extent of over or
underperformance against targets, this will
provide additional insight into how the
Committee viewed performance over the year
and the factors it regarded as having more of
a bearing on executive pay decisions. The
priority areas for 2021 include financial and
risk performance as well as measures related
to climate, enterprise, customers, shared
purpose and culture.
Robert Gillespie
Chairman of the Group Performance and
Remuneration Committee
19 February 2021
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
122
Directors’ remuneration report
What are the principles behind the executive directors’ remuneration policy?
Alignment with our purpose and
building a sustainable bank
Built around a restrained pay position for
executive directors, with variable pay
delivered entirely in shares as LTI awards.
Alignment via shares between executives
and shareholders
Aligns executives with shareholders
predominantly through holding shares, both
during and after employment.
Performance is assessed using a robust
framework against pre-set objectives
which include measures related to our
strategy and purpose. The measures are
demanding but set at a level which
executive directors would reasonably be
expected to achieve, encouraging safe and
secure growth.
Appropriate for a less incentivised culture,
which is consistent with how remuneration
is structured across the wider bank.
The maximum value of LTI awards is smaller
than traditional long-term incentive plans and
there are significant shareholding
requirements in place, which apply both
during and after employment.
Performance is assessed before grant and
again before vesting. Awards are adjusted for
underperformance or risk failings and are
released over eight years, subject to the
application of malus and clawback, for a long-
term view of performance.
Alignment with the growing external
consensus on executive pay
The policy was introduced in 2017 and
reflected the Executive Remuneration
Working Group and Government
announcements on executive pay, calling for
reduced complexity and quantum.
Investors continue to call for restraint,
meaningful shareholdings and flexibility of
pay design. Evolving regulatory expectations
are also taken into account.
Amendments were made to the policy at the
2020 AGM to align with the UK Corporate
Governance Code and best practice
guidance on pension rates and post-
employment shareholding requirements.
How will executive directors be paid for the 2021 performance year?
Pay element
CEO
CFO
Additional information
Fixed pay
Base salary (cash)
£1,100,000
£750,000
No changes proposed for 2021. Salary will be reviewed
annually within the terms of the policy.
Pension (cash)
£110,000
£75,000
Benefits (cash)
£26,250
£26,250
The pension rate remains at 10% of base salary, in line
with the rate for the wider workforce.
No change to the standard level of benefit funding. Other
benefits can be paid within the terms of the policy.
Fixed share
allowance (shares)
£1,100,000
£750,000
No change. The allowance is set at 100% of base salary,
paid quarterly in shares and released over three years.
LTI award
Quantum
(maximum)
CEO
CFO
Additional information
£1,925,000
(175% of salary)
£1,500,000
(200% of salary)
Maximum award levels remain unchanged. Awards are
delivered entirely in shares.
Performance
conditions
Assessments prior to grant and again prior to vesting. Risk &
control and stakeholder perception underpins also apply.
Vesting
period
Pro-rata vesting over years three to seven from grant.
Retention
12-month retention period applied to each vesting.
Performance assessed ‘in the round’ against pre-set
goals, within a framework that uses priority areas and
ratings rather than traditional formulaic weightings.
LTI awards vest over a long timeframe and remain
subject to malus and clawback provisions.
The combination of vesting and retention periods mean
shares are released four to eight years after grant.
Leaver terms
Awards lapse unless individual qualifies as a good leaver.
No pro-rating of awards after grant for good leavers.
Details on why the disapplication of pro-rating is
considered appropriate can be found on page 132.
Expected
value
Other
Expected to vest at 80% of maximum opportunity over time,
taking into account the pre-grant and pre-vest tests.
Reductions have been applied to all grants since the
construct was introduced.
CEO
CFO
Additional information
Shareholding
requirement
To hold shares
during and after
employment.
400% of salary
250% of salary
A post-employment requirement was introduced in 2020.
Executive directors must hold a set number of shares for
a period of two years post departure. Nominee accounts
will be used to hold shares subject to restrictions.
Dividend
adjustments
Following approval of the policy at the 2020 AGM, LTI
awards can be granted using an adjusted share price to
reflect the absence of dividends during the vesting period.
Grants made in 2021 onwards will use an adjusted share
price, calculated with reference to estimated dividend
yields and the length of the vesting period.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
123
Directors’ remuneration report
Aligning wider workforce and executive pay
The Committee retains oversight of the remuneration policy for all colleagues*. Consistent with the principles for executive remuneration, the
aim is to deliver a simple and transparent pay policy which promotes the long-term success of NatWest Group. The remuneration policy
supports a culture where individuals are rewarded for delivering sustained performance in line with risk appetite and for demonstrating the right
behaviours. The same principles apply to everyone with some minor adjustments where necessary to comply with local regulatory requirements.
All colleagues
Certain colleagues depending on location, grade or role
Senior executives only
Base salary and pension
funding
Benefits and share
plans
Role-based
allowances
Annual bonus
LTI awards
Base salary is intended
to provide a competitive
level of fixed cash
remuneration.
Base salaries are
reviewed annually and
reflect the talents, skills
and competencies that
the individual brings to
the business.
Colleagues are provided
with additional funding
which they can use to
save in one of the
company’s pension
schemes.
Colleagues in the UK
receive pension funding
at 10% of base salary,
which is the same rate
that applies to executive
directors. Rates in other
locations reflect local
market practice.
Individuals can access a
range of flexible and
competitive benefits.
Benefits offered include
private medical cover,
dental cover, personal
accident insurance, life
assurance and critical
illness insurance.
Some colleagues
receive funding which
they can use towards
the cost of benefits or
take as cash.
Individuals in some
jurisdictions can also
participate in one or
more of the company’s
share plans. This
provides them with an
efficient way to buy
NatWest Group plc
shares and aligns their
interests with
shareholders.
Role-based
allowances reflect the
skills and experience
required for certain
roles.
They form an element
of fixed remuneration
for regulatory
purposes and are
delivered in cash
and/or shares
depending on the
level of the allowance
and the seniority of
the recipient.
Shares are released
in instalments over a
three-year retention
period.
The purpose is to support
a culture where
individuals are rewarded
for superior performance.
The annual bonus pool is
based on a balanced
scorecard of measures
including Finance, Risk,
Customer and People &
Culture measures.
Allocation from the pool
depends on performance
of the business area and
the individual.
Awards are made in cash
and/or shares with larger
awards paid out over
several years. Where
appropriate, awards can
be adjusted or cancelled
through malus and
clawback.
LTI awards encourage
the creation of a
sustainable business.
Executive directors and
certain members of
senior executive
committees receive LTI
awards rather than
annual bonus.
Awards are delivered
entirely in shares based
on progress against the
scorecard of Finance,
Risk, Customer and
People & Culture
measures, aligned with
our purpose.
Awards vest in equal
tranches across years 3
to 7 following grant,
followed by a 12-month
retention period, and can
be adjusted through
malus and clawback.
LTI participants are also
subject to shareholding
requirements.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Fixed Pay
Variable pay
NatWest Group Annual Report and Accounts 2020
124
Directors’ remuneration report
Listening to colleagues
There is a well-developed process in place to listen to the views of the workforce. This provides opportunities to improve by assessing colleague
sentiment and checking progress in making NatWest Group a great place to work.
A colleague opinion (Our View) survey provides all colleagues with the opportunity to have a say on what it feels like to
work at NatWest Group, twice per year. Nearly 50,000 colleagues participated in the latest survey, which took place in
September 2020. Regular engagement with colleagues also takes place throughout the year. Board members would
normally visit business areas to hear directly from colleagues along with townhall meetings and question and answer
sessions with senior executives. Due to the restrictions in place for most of the year, there has been more focus on
regular online engagement. Feedback from colleagues is included in the people measures that impact executive pay.
Engagement with
colleagues
Engagement on remuneration also takes place with representatives from Unite in Great Britain and Offshore and the
Financial Services Union in Ulster Bank.
In 2018, the CAP was established in response to the revised UK Corporate Governance Code to promote colleague
voice in the boardroom. The CAP is chaired by Lena Wilson as a designated non-executive director and facilitates
regular dialogue between colleagues and Board members. It includes colleagues who volunteered to be involved,
representatives from trade union bodies and works councils, the colleague-led networks and junior management teams.
Following each meeting, a summary is provided to the Board and a follow-up call is held so that members of the CAP
can hear how their views were shared and what happened as a result. Feedback has been good with members
highlighting that the CAP is open, transparent, engaging and members feel able to share their views with the Board.
The CAP met four times in 2020 and provided views to the Board on areas such as purpose, inclusion and COVID-19
support for colleagues and customers. In November, the CAP heard directly from the Committee Chairman on the
executive directors’ remuneration policy; how such policy aligns with the broader reward policy; how pay is managed;
fair pay; and colleague sentiment on reward. CAP members were appreciative of the in-depth explanation of executive
director remuneration. Members’ feedback was positive, stating that the principles behind executive director pay were
clear and fair.
Colleague
Advisory Panel
(CAP)
* References to “colleagues” here includes all employees and, in some instances, it also captures other members of the wider workforce, for example, contractors
and agency workers.
Supporting colleagues throughout the COVID-19 pandemic
From the outset, supporting colleagues has been a priority and a summary of the measures put in place is set out below:
NatWest Group did not furlough any colleagues during 2020.
Pay was protected until the end of September regardless of the need to take time off for COVID-19 related illness, dependants care, isolation
or childcare.
Steps were taken to ensure all physical distancing and protective measures were in place, including the use of static desks,
recommendations on the use of face coverings and thermal imaging where appropriate.
A commitment was made to pay expenses incurred to travel to work if normal public transport was disrupted or not safe.
Home working was quickly made available to over 50,000 colleagues, who could also request equipment to work from home effectively.
A virtual GP service was made available, allowing colleagues to access a doctor 24 hours a day.
Silvercloud was launched, which contains a guided suite of wellbeing programmes to help support mental health.
NatWest Group maintained all its internships and did not cut any apprenticeship programmes during 2020.
Support continues for colleagues through a comprehensive employment policy suite. In particular, there are competitive leave and sickness
absence policies, where all COVID-19 sickness absences continue to be fully paid.
Further details on NatWest Group’s broader response to the pandemic and support for colleagues can be found in the Strategic report.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
125
Directors’ remuneration report
Our approach to reward and fairness
Reward is an important part of the colleague proposition at
NatWest Group contributing to making colleagues feel valued,
respected and recognised for the work that they do.
Fair reward is one of the key things that NatWest Group is
committed to in order to provide a great place to work for
everyone.
Financial
Wellbeing
This means NatWest Group will pay colleagues fairly for the job
they do and be clear on how they can make their pay and benefits
work for them.
This is underpinned by the Group’s Reward Policy – a global
framework for the design of remuneration programmes in NatWest
Group. The objective is to deliver reward in a way that is aligned to
the current and future needs of the business, enabling managers
to use reward as a business tool alongside other people initiatives.
Recognition
Fixed Pay
How do we
define
Reward?
Benefits
Variable Pay
Saving for life
after work
Our Fair Pay Charter
Principles to support fairness for all our colleagues
1. Simplicity
The reward proposition has been simplified to make it easier for colleagues to understand.
2. Consistency
The structure of pay and benefits is consistent for colleagues based on their location and role, with a clear rationale for
exceptions.
3. Flexibility
Colleagues are supported in working flexibly, in ways that balance customer and business needs and their personal
circumstances. Colleagues can also select the combination and level of benefits that best meets their needs.
4. Transparency
Pay decisions reflect the performance of NatWest Group and the individual, taking into account the behaviours and
values demonstrated. Information on salary ranges and the annual pay review is readily available to all colleagues.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Gender and ethnicity pay gaps are reported.
5. Listening
6. Clarity
7. Reliability
8. Inclusive
Colleagues are surveyed regularly, and engagement sessions are held on reward with our colleague representatives
and the Colleague Advisory Panel.
Clear communications are provided on pay and performance decisions. Clear expectations are set on how colleagues
are rewarded and the principles guiding decisions, including having clearly defined performance goals, regular check-
ins with managers and feedback.
Pay is well administered with colleagues paid accurately and on time. Colleagues can access their payslips and other
pay documents 24/7 via Workday.
NatWest Group requires fairness and inclusion and that judgement is exercised with thought and integrity. There is a
Group-wide commitment to rewarding colleagues in a way that is free from discrimination.
9. Competitive
A competitive total reward proposition is provided that enables NatWest Group to attract, motivate and retain
colleagues based on market rates for their role, location, performance, skills and experience.
10. Security
There is an appropriate mix of fixed and variable pay and a core level of benefits. NatWest Group is an accredited
Living Wage Employer in the UK with rates of pay that exceed the Living Wage Foundation Benchmarks.
The Our View survey compares responses to questions from colleagues at NatWest Group against the position in other companies, known as
the Global Financial Services (GFS) Norm. The 2020 results show that sentiment on reward, benefits and recognition continues to be good. All
areas are above the GFS Norm, significantly in some cases. The Total Reward category and three of the five specific questions improved during
the year.
Our View survey
Total Reward
Colleagues who think they are paid fairly for the work they do
Understand how their pay is determined
Understand how their bonus is determined
Believes the bank’s benefit programme fits their needs
Manager regularly gives them recognition for work well done
2020 favourable score
80
73
89
78
81
87
Versus 2019
+1
+2
+1
+3
-2
no change
Versus GFS Norm
+9
+13
+16
+2
+6
+4
NatWest Group Annual Report and Accounts 2020
126
Directors’ remuneration report
A great place to work
In order to create a great place to work for everyone, NatWest Group is committed to providing: a fulfilling job; excellent development; fair
rewards and great leadership; underpinned by a healthy and inclusive workplace where colleagues can be themselves.
A fulfilling role in a great team
A challenging but rewarding job where colleagues have
the tools to succeed and a sense of direction and purpose
Excellent development
Help to build the capabilities needed to thrive
and do a great job (both now and in the future)
A healthy
and inclusive
environment
Fair rewards
Paying colleagues fairly for the work they do and being
really clear on how they can make their pay work for them
Great leadership
Equipping all managers to give their teams the
support and leadership they need to thrive
Pay and performance
Creating a healthy culture
An inclusive workplace
Having a simple and transparent pay
structure supports colleagues in doing the
right thing for customers. All Grade A and
the majority of Grade B level colleagues are
remunerated through fixed pay only, which
was increased when variable pay was
removed. This provides them with greater
security and allows them to fully focus on the
needs of the customer.
The long-term success of NatWest Group
depends on building and nurturing a healthy
culture where colleagues are engaged, and
where the working environment is
underpinned by robust risk behaviours.
Our Values and Our Code are there to guide
colleagues in their interactions with
customers and to reinforce the right
behaviours and long-term decision making.
Regular performance conversations,
coaching and development help colleagues
to do their best every day. Colleague
performance and development is managed
continuously through setting goals and
regular check-ins to discuss progress,
development and feedback. Importantly,
performance is assessed not just on what
has been achieved but also on how it has
been achieved. Critical People Capability
behaviours are used to provide a consistent
Group-wide behavioural measure.
NatWest Group continues to target
colleague financial wellbeing with a strategy
that focuses on budgeting & planning,
savings & investment, debt management,
protection and saving for life after work.
Progress on culture is monitored and
feedback is received from regulators and
industry bodies, including the Banking
Standards Board’s (BSB) annual
assessment of culture in the UK banking
sector.
There has been continued progress for 2020
with four of the BSB survey categories
improving during the year, four staying the
same and only one, on resilience, showing a
slight decline.
The NatWest Group Learning Academy was
launched in 2020 to recognise the
importance of having a continuous learning
culture. The aim is to help colleagues learn
and reflect as well as build current and
future skills.
The goal is to create a sustainable,
progressive, inclusive and diverse
workplace, that champions potential, helping
people, families and businesses to
thrive. NatWest Group’s positive action
approach ensures that people policies and
processes are inclusive and accessible –
from attracting and recruiting colleagues to
how we reward and engage them - and is
helping to achieve a better balance of
diversity throughout the organisation.
In 2015 a target was set for each business
area to have >30% women in their most
senior roles by 2020. 14 of our 15
businesses have achieved this. Overall,
there are now 39% women in this
population, representing a 10% increase
since 2015. NatWest Group is committed to
full gender balance by 2030. In 2018, a goal
was set to have 14% Black, Asian and
Minority Ethnic leaders in the UK by 2025. At
10%, this has increased by 2% since targets
were introduced. During 2020, a new goal
was set to have c.3% Black colleagues in
UK senior roles by 2025.
Inclusivity continues to score highly in the
colleague opinion survey, with colleagues
scoring NatWest Group 17 points above the
GFS Norm.
Alignment with executive pay
Targets to support building the capability of colleagues, strengthening culture and building a diverse workforce with an inclusive environment
are part of the measures that impact the pay awarded to executive directors. See pages 135 to 138 for further details.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
127
Directors’ remuneration report
Highlights of building a healthy and inclusive workplace in 2020
Recognition
Launched the NatWest Group Learning Academy to assist with
Won the 2020 REBA Wellbeing Award for Best Approach to
learning in areas such as being purpose-led, climate and diversity
& inclusion.
Wellbeing hub created to support colleagues through COVID-19.
Mandatory mental health awareness module for line managers.
Creation of a Racial Equality Taskforce setting out new targets
and commitments and help for teams to talk about racism.
Developed a new mandatory learning module called ‘inclusion
with purpose’ to help to educate on bias, power and privilege and
micro aggressions to support behaviour change.
Promoted greater ESG awareness for colleagues with tools on
the intranet and a travel and home carbon calculator.
Hosted our 2nd Disability Conference in Scotland in collaboration
with the Business Disability Forum.
Founding partners and category sponsor for the 2020 British
LGBT Awards.
Greater focus on financial wellbeing, with initiatives targeted at
encouraging colleagues to save more for life after work.
Met Hampton-Alexander and Parker Review Board requirements
on gender and ethnicity.
Long-term Financial Wellbeing
Founding signatory to HMT’s Women in Finance Charter
Signatory to the UN Women Empowerment Principles
A Times Top 50 Employer for Women (since 2005)
Rated in the top organisations in Bloomberg’s Global Gender
Equality Index
Ranked Leader level in Govt.’s Disability Confident Scheme
Rated Gold in the Business Disability Forum benchmark
Founding signatory of UK Govt.’s Race Equality Charter
Named as a Top 10 Outstanding Employer in the Investing in
Race and Ethnicity 2020 Ethnicity 100+ list
Top Global Stonewall Employer since benchmark’s inception
Signatory to the UN Principles for Responsible Banking and
2030 UN Sustainability Development
Expert Level in the Scottish Carer Positive campaign
Ranked Top 5 overall in the McKenzie-Delis Packer Review
Working Families UK Best Practice Awards (2020/2019)
Diversity in Finance Awards (2020): Initiative of the Year and
Championing Social Mobility
Further information on NatWest Group’s approach to culture, developing colleagues and inclusion can be found in the Strategic report.
Pay gaps and pay ratio disclosures
The latest gender and ethnicity pay gap reporting for NatWest Group together with the steps being taken to address the position can be found in
the ‘Our Colleagues’ section of the Strategic report and on natwestgroup.com. The CEO to employee pay ratios and further information on
remuneration for the wider workforce can be found later in this report.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
128
Directors’ remuneration report
How executive remuneration is linked to NatWest Group’s ESG approach and purpose
In addition to financial targets, the 2020 performance goals used to determine variable pay for executive directors included a range of ESG
measures. These were set to reflect the new strategy and key focus areas of Climate, Enterprise & Learning. New goals were created around
climate (‘to be a leading bank helping to address the climate challenge’), enterprise (‘new business creation irrespective of gender, background
or geography’) and people targets were focussed on shared purpose and building the capability of colleagues. The Blueprint for Better Business
(BfBB) framework was used to complement the existing balanced scorecard. The ESG goals and measures for 2020 are set out below with
details of the performance assessment against the targets on page 135 to 138.
Purpose and BfBB alignment
Performance goals
2020 performance measures for 2021 LTI awards
E
S
G
A guardian for future
generations.
To be a leading bank helping to
address the climate challenge.
Honest & fair with customers
and suppliers.
Meaningful increase in customer
advocacy. Build trust with our
customers.
A good citizen.
Creation of new businesses.
A responsible and responsive
employer.
Build the capability of colleagues
to realise their potential. Build up
and strengthen a healthy culture.
Embed our shared purpose
across the business and brands.
Develop a diverse workforce and
inclusive environment.
Has a purpose which delivers
long-term sustainable
performance.
Maintain a robust control
environment.
Material progress towards
desired risk culture.
Run a safe and secure
bank.
Progress towards climate positive operations
by 2025.
Increase funding and financing for climate and
sustainable finance.
Set sector specific targets for emissions
reduction.
Achieve targets for Net Promoter Scores
across top 5 customer journeys.
Achieve improved net trust scores for NatWest
and Royal Bank of Scotland.
Creation of new businesses, ensuring
everyone has the same opportunity to
progress irrespective of gender, background
or geography.
Achieve the capability targets.
Achieve the culture targets based on the
Banking Standards Board assessment.
Achieve the shared purpose targets.
Progress on the number of women across the
top three layers and number of Black, Asian
and Minority Ethnic UK employees in the top
four layers of NatWest Group.
Achieve the inclusion targets.
Achieve or maintain an effective control
environment rating.
Effective management of compliance with
ring-fencing rules.
Achieve or maintain a ‘systematic’ risk culture
rating.
Achieve CET1 ratio target for NatWest Group
and NWH Group, with appropriate repatriation
of capital to NatWest Group.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
129
Directors’ remuneration report
Complying with the UK Corporate Governance Code (the ‘Code’)
The table below supplements other information in this report in order to evidence compliance with Code requirements. The Committee continues
to monitor and reflect on best practice when developing remuneration practices for NatWest Group.
Provision
NatWest Group approach to compliance
Post-employment
shareholding requirement
Pension rate aligned with
the wider workforce
A formal post-employment shareholding requirement was introduced for executive directors under the 2020
policy, in order to fully comply with the Code and the Investment Association’s Principles of Remuneration.
The requirement will apply for two years at a level equal to the lower of the shareholding requirement
immediately prior to departure or the actual shareholding on departure. Procedures are in place to assist
with the enforcement of the requirement, as described in the policy on the next page.
The pension rate for executive directors has been aligned with the rate applicable to the wider workforce in the
UK, currently 10% of base salary.
Review workforce
remuneration and
alignment with culture
Consider factors such as
clarity, simplicity, risk,
predictability,
proportionality and
alignment to culture when
determining the policy
Engagement with
colleagues
Discretion
Malus and clawback
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
The Committee considers a range of information on the broader workforce, for example, the Group-wide
remuneration policy principles, annual pay outcomes including diversity information across the workforce,
bonus pool allocations, the deferral policy, and the annual Sharesave offer for colleagues.
Culture is part of a suite of measures used to assess progress in building a healthy and inclusive workplace
and performance against culture targets directly impacts the variable pay of both senior executives and other
colleagues. The governance of culture is clearly laid out with specific Senior Management Function roles
having defined accountabilities, which is taken into account in their pay decisions.
The Committee works closely with the Group Sustainable Banking Committee (SBC), which has a specific
focus on people and culture. The decision to remove front-line incentives for large numbers of colleagues in
recent years, in order to align with the desired culture, was something that both committees supported.
In 2020, the committees held a joint session to review wider workforce remuneration focusing on the areas of
colleague recognition, fair pay and financial wellbeing.
Having a simplified construct for executive directors, with only one form of variable pay, was one of the main
intents behind the current policy.
The majority of the remuneration is share-based, creating clear alignment with shareholders. There is clarity
for executives, by having performance conditions that they should reasonably be expected to achieve, and
detailed disclosure to provide transparency for shareholders.
Risk is taken into account at various stages of the performance assessment, supported by the use of
underpins. Malus and clawback provide further tools to deliver risk-adjusted performance.
The LTI construct is based on lower maximum award levels compared to typical market practice and
reasonable performance expectations, which helps to create more predictable outcomes and encourage safe
and secure growth.
Variable pay cannot be awarded above the level of fixed pay which is considered to be a restrained and
proportionate approach to executive remuneration. Any variable pay awarded is subject to the achievement of
performance against strategic goals and delivered over a long time horizon.
As set out above, culture is part of a balanced scorecard that is used to assess performance, and this includes
consideration of both what has been achieved and how it has been achieved.
The CAP provides a formal mechanism for engagement between the workforce and Board members. The
Committee Chairman meets with the CAP each year to discuss executive remuneration and its alignment with
the wider pay policy. The Chairman of the CAP is also a member of the Committee.
If the CAP expresses any concerns on pay matters these would be raised with the Committee. Further
information on the CAP and how colleagues’ views are taken into account is set out earlier in this report.
Discretion can be applied under the company’s share plan rules where appropriate and the Committee has
applied downwards discretion in the past, and also again this year, to LTI outcomes. Discretion is only used to
ensure a fair outcome for the director and for shareholders and any use of discretion will be disclosed.
When assessing performance, the Committee can exercise its judgement to determine the appropriate vesting
of LTI awards, supported by the application of underpins, which helps to avoid any potentially unintended
outcomes that might arise from the application of formulaic performance criteria.
The Committee also has discretion to make minor amendments to the directors’ remuneration policy to reflect
changing legal or regulatory requirements, provided there is no material advantage to the directors, and can
also use discretion to apply malus and clawback to LTI awards.
Malus allows the amount of any unvested variable pay awards to be reduced, potentially to zero, prior to
payment. Clawback allows for recovery of variable pay awards that have already vested. The circumstances
in which NatWest Group may apply malus or clawback include:
- conduct which results in significant financial losses for NatWest Group;
- the individual failing to meet appropriate standards of fitness and propriety;
- an individual’s misbehaviour or material error;
- NatWest Group or the individual’s business unit suffering a material failure of risk management; and
- for malus and in-year bonus reduction only, circumstances where there has been a material
downturn in financial performance.
The above list of circumstances is not exhaustive and NatWest Group may consider any further
circumstances as it deems appropriate.
NatWest Group Annual Report and Accounts 2020
130
Directors’ remuneration policy
Remuneration policy for executive directors
The remuneration policy was approved at the AGM on 29 April 2020 and will apply until the 2023 AGM unless changes are required. There are
no changes requiring shareholder approval at this time. The table summarises the key features of the policy. In the event of any conflict the
approved policy, which can be found under the Governance section of natwestgroup.com, takes precedence over the information set out below.
Purpose and link to strategy
Base Salary
To provide a competitive level of
cash remuneration which, along
with other elements of fixed pay,
ensures less reliance on variable
pay and discourages excessive
risk-taking.
Operation
Paid monthly in cash and reviewed annually.
The rates for 2021 are unchanged:
CEO – £1,100,000
CFO – £750,000
Fixed share allowance
To provide fixed pay that reflects
the skills and experience required
and responsibilities for the role.
A fixed allowance paid entirely in shares. The shares vest
immediately, subject to any deductions for tax and are
released in equal tranches over a three-year retention
period.
Maximum potential value
Future salary increases will not normally
be greater than the average salary
increase for the wider workforce over the
period. Other than in exceptional
circumstances, the salary will not increase
by more than 15% over the course of this
policy.
An award of shares with an annual value
of up to 100% of base salary at the time of
award.
Benefits
To provide a range of flexible and
market competitive benefits that is
valued by recipients and assists
them in carrying out their duties
effectively.
Executive directors can select from a range of standard
benefits including: company car; private medical cover; life
assurance; and critical illness insurance. Executive directors
are also entitled to travel assistance in connection with
company business including the use of a car and driver.
NatWest Group will meet the cost of any tax on the benefit.
Set level of funding for standard benefits
(currently £26,250) which is subject to
periodic review. The total value of benefits
provided is disclosed each year in the
Annual report on remuneration.
Pension
To encourage planning for
retirement and long-term savings.
Long-term incentive (LTI) award
To support a culture where
individuals are rewarded for the
delivery of sustained performance,
taking into account NatWest
Group’s strategy and purpose.
Performance assessed across four
key areas, with a balanced
scorecard of financial and non-
financial measures, to encourage
long-term value creation.
Delivery in shares with the ability to
adjust awards through malus and
clawback further supports longer-
term alignment with shareholders’
interests.
Shareholding requirements
To ensure executive directors build
and continue to hold a significant
shareholding over the long term.
Further benefits including relocation costs may be offered in
line with market practice. NatWest Group may also put in
place certain security arrangements for executive directors
and meet the cost of any tax due on these benefits.
Provision of a monthly pension allowance paid in cash and
based on a percentage of salary. Opportunity to use the
cash to participate in a defined contribution pension
scheme.
CEO – 10% of base salary
CFO – 10% of base salary
LTI awards are subject to:
a one-year pre-grant performance period;
a pre-vest performance assessment at the end of a
three-year period, with vesting taking place from years
three to seven after grant;
malus prior to vesting and clawback which applies for
seven (potentially ten) years from award; and
a 12-month post-vesting retention period.
Performance will be assessed in the areas of Finance, Risk,
Customers, People, Culture and purpose to determine
whether the executive has achieved what would reasonably
have been expected in the circumstances. Risk & Control
and Stakeholder Perception underpins will also apply.
The number of shares awarded may be calculated using a
share price discounted to reflect the absence of the right to
receive dividends during the vesting period.
Unvested shares from LTI awards will count on a net of tax
basis towards meeting the shareholding requirement once
the pre-vest performance assessment has taken place.
When the applicable retention period has passed, the
executive directors can dispose of up to 25% of the net of
tax shares received until the shareholding requirement is
met.
Following cessation of employment, executive directors are
required to hold shares of a value equal to the lower of
their shareholding requirement immediately prior to
departure or the actual shareholding on departure, for a
period of two years. The requirement encompasses vested
and unvested shares. A fixed number of shares for the
post-employment requirement will be determined at the
date of departure.
The maximum potential value of benefits
will depend on the type of benefit and cost
of its provision, which will vary according to
market rates.
Pension allowances for executive directors
have been aligned with the wider
workforce in the UK, currently 10% of base
salary. The rate may be increased or
reduced in order to remain aligned with the
workforce.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
The maximum award for current directors
at the time of grant is capped at:
CEO - 175% of salary.
CFO - 200% of salary.
Prior performance will be taken into
account when determining the value of the
award at the time of grant. A robust
framework is used to consider
performance against pre-set objectives for
each of the categories and the Committee
then uses its judgement to consider the
appropriate outcome, taking all relevant
circumstances into account.
The vesting level of the award can vary
between 0% and 100% of the original
number of shares granted, subject to the
delivery of sustained performance.
CEO - 400% of salary.
CFO - 250% of salary.
Requirements may be reviewed in future
but are not expected to be reduced.
Procedures are in place to assist with the
enforcement of the shareholding
requirements, both during and after
employment. Executive directors have
agreed to be bound by the terms of the
requirements and nominee accounts will
be used to hold shares subject to
restrictions.
NatWest Group Annual Report and Accounts 2020
131
Directors’ remuneration policy
Remuneration for the Chairman and non-executive directors
Purpose and link to
strategy
Fees
To provide competitive
fixed remuneration that
reflects the skills,
experience and time
commitment required
for the role.
Benefits
To provide a level of
benefits in line with
market practice.
Operation
Fees are paid monthly in cash and reviewed regularly. Additional
fees may be paid for new Board Committees provided these are not
greater than fees payable for the existing Board Committees.
No variable pay is provided so that the Chairman and non-executive
directors can maintain appropriate independence.
Reimbursement of reasonable out-of-pocket expenses incurred in
connection with the performance of duties.
The Chairman and non-executive directors are entitled to travel
assistance in connection with company business including the use of
a car and driver. NatWest Group will meet the cost of any tax due on
the benefit. Other benefits may be offered in line with market
practice. The Chairman is entitled to private medical cover and life
insurance cover.
Maximum potential value
The rates for the year ahead are set out in
the Annual report on remuneration.
Other than in exceptional circumstances,
fees will not increase by more than 15%
over the course of this policy.
The value of the private medical and life
insurance cover provided to the Chairman
together with any other benefits will be in
line with market rates and disclosed in the
Annual report on remuneration.
Other policy elements for directors
Provision
Recruitment
policy
Operation
A Boardroom Inclusion Policy is in place which aims to promote diversity and inclusion in the composition of the Board. The
framework aims to ensure NatWest Group can attract, motivate and retain the best talent and avoid limiting potential caused
by bias, prejudice or discrimination.The policy on the recruitment of new directors aims to be competitive and to structure pay
in line with the framework applicable to current directors, recognising that some adjustment to quantum within that framework
may be necessary to secure the preferred candidate. A buy-out policy exists to replace awards forfeited or payments
foregone, which is in line with regulatory requirements. The Committee will minimise buy-outs wherever possible and ensure
they are no more generous than, and on substantially similar terms to, the original awards or payments they are replacing.
Notice and
termination
provisions
Executive directors
As set out in executive directors’ service contracts, NatWest Group or the executive director is required to give 12 months’
notice to the other party to terminate the employment. There is discretion for NatWest Group to make a payment in lieu of
notice (based on salary only) which is released in monthly instalments. The executive director must take all reasonable steps
to find alternative work and any remaining instalments will be reduced as appropriate to offset income from any such work.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Chairman and non-executive directors
The Chairman and the non-executive directors do not have service contracts, they have letters of appointment. They do not
have notice periods and no compensation would be paid in the event of termination of appointment, other than standard
payments payable for the period served up to the termination date.
Under the Board Appointment Policy, non-executive directors are appointed for an initial term of three years, subject to
annual re-election by shareholders. At the end of this initial term, a further three-year term may be agreed. Non-executive
directors may be invited to serve beyond six years, up to a maximum tenure of nine years. The Chairman is not subject to
the Board Appointment Policy but is subject to the requirements relating to the maximum tenure period for chairs under the
Code. All directors stand for annual election or re-election by shareholders at the company’s AGM.
Effective dates of appointment for directors:
Howard Davies - 14 July 2015
Alison Rose - 1 November 2019
Katie Murray - 1 January 2019
Frank Dangeard – 16 May 2016
Patrick Flynn – 1 June 2018
Morten Friis – 10 April 2014
Robert Gillespie – 2 December 2013
Yasmin Jetha - 21 June 2017*
Mike Rogers – 26 January 2016
Mark Seligman – 1 April 2017
Lena Wilson – 1 January 2018
* Yasmin Jetha’s first appointment to the Board following which she stepped down in 2018 to serve solely as a director of key entities in
preparation for the ring-fencing regime before re-joining the Board on 1 April 2020.
Legacy
arrangements
NatWest Group can continue to honour any previous commitments or arrangements entered into with current or former
directors that may have different terms, including terms agreed prior to appointment as an executive director.
Treatment of
outstanding
share plan
awards on
termination
On termination, share awards will be treated in accordance with the relevant plan rules as approved by shareholders. LTI
awards normally lapse on leaving unless the termination is for one of a limited number of specified good leaver reasons.
Under the remuneration policy approved by shareholders at the 2017 and 2020 AGMs, LTI awards made in 2018 onwards
will be pro-rated for the period worked prior to grant but following grant no further pro-rating will be applied to good leavers.
No pro-rating after grant is fundamental to the LTI construct and allows for a fair level of value to be delivered to the
executives whilst having significantly lower maximum variable pay levels compared to peers. NatWest Group operates an
LTI only construct, whilst peers also offer annual bonus awards (which typically are also not subject to pro-rating after grant).
Without the removal of pro-rating, executives at NatWest Group could potentially receive no variable pay for the year of
joining, in line with regulatory requirements, or in the final year of employment.
The main emphasis of the performance assessment is normally on the pre-grant test, which means the award has already
been ‘earned’ to a large extent by the time of grant. The removal of pro-rating creates higher levels of shareholding for up to
eight years post departure meaning executives can be held accountable for, and are financially exposed to, the long-term
consequences of their actions, including through malus and clawback.
NatWest Group Annual Report and Accounts 2020
132
Annual report on remuneration
Where indicated in the margins with a bracket, information is within the scope of the independent auditor’s report.
Single total figure of remuneration for executive directors for 2020
Base salary
Fixed share allowance (2)
Benefits (3)
Pension (4)
Total fixed remuneration
Annual bonus
Long-term incentive award (5)
Total variable remuneration
Total remuneration
Alison Rose (1)
2019
£000
183
183
10
18
394
n/a
1,007
1,007
1,401
2020
£000
1,100
674
81
110
1,965
n/a
650
650
2,615
Katie Murray
2020
£000
750
750
47
75
1,622
n/a
—
—
1,622
2019
£000
750
750
26
75
1,601
n/a
140
140
1,741
Notes:
(1)
(2)
(3)
(4)
(5)
Fixed remuneration for 2019 reflects a part-year position for Ms Rose as she joined the Board on 1 November 2019.
The fixed share allowance is based on 100% of salary and, as part of fixed remuneration, is not subject to any performance conditions. In April 2020, Ms Rose
announced she would forgo 25% of her fixed pay for the rest of the year. This was achieved through a reduction of £426,078 to her fixed share allowance.
NatWest Group made a comparable donation to the NET Coronavirus Appeal.
Includes standard benefit funding for all at £26,250 per annum. In addition, Ms Rose received travel assistance in connection with company business
(£23,029) and an upgrade to the existing home security system (£31,793) with Katie Murray also receiving travel assistance (£3,952) and home security
arrangements (£16,939).
The executive directors receive a monthly cash allowance and can choose to participate in the company’s defined contribution pension arrangements.
The 2020 value for Ms Rose relates to an LTI award granted in 2018, prior to becoming an executive director. The pre-vest performance assessment has now
taken place as set out on the next page. No discretion was exercised by the Committee as a result of the share price changing over the performance period.
The estimated value above for Ms Rose is £850,000 lower than the maximum award available in 2018 (£1.5m). Of that reduction, £275,000 is due to
adjustments under the pre-grant and pre-vest performance assessments and the remaining £575,000 is as a result of the fall in share price over the period. No
dividend equivalents were paid on the award prior to vesting. Ms Murray did not receive an LTI award in 2018 due to being on a different remuneration
construct at that time.
Scheme interests – LTI awards granted during 2020
Grant date
Face value of
award (£000s)
Number of
shares awarded (1)
Alison Rose
9 March 2020
1,500
881,679
Katie Murray
9 March 2020
1,100
646,565
% vesting at
minimum and
maximum
Between 0% -
100% with no
set minimum
vesting
Performance requirements
The awards were subject to a pre-grant assessment of
performance over 2019 and a further assessment will
take place following the end of the 2022 financial year.
Further details of the LTI performance assessment
framework can be found on the pages that follow as well
as the 2019 Annual Report and Accounts.
Note:
(1) Conditional share awards were granted equating to c.136% of base salary for Ms Rose and c.147% of base salary for Ms Murray. The number of shares was
calculated taking into account performance and the maximum potential award for each individual. The award price of £1.701 was based on the average share
price over five business days prior to grant. Subject to the pre-vest assessment, these awards will be eligible to vest in equal amounts between years 2023 and
2027. Service conditions and malus provisions apply up until vest, and clawback provisions apply for a period of at least seven years from the date of grant.
NatWest Group Annual Report and Accounts 2020
133
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Annual report on remuneration
2018 LTI award - Pre-vest performance assessment framework
LTI awards were made in early 2018 following an assessment of performance over the 2017 financial year. In accordance with the LTI
construct, the Committee has undertaken a further review of performance for 2017 to consider whether anything has come to light which might
call into question the original award. Any indication of underperformance is reviewed to assess whether it would be appropriate to make a
reduction. The process that has been followed to determine whether sustainable performance has been delivered for the 2018 LTI award is set
out below. An assessment of performance was provided by internal control functions and PwC provided an independent view to the Committee.
Pre-vest test for 2018 LTI award - when looking back to performance for 2017, and ‘knowing what we know now’, has NatWest Group:
Core
questions
1. Remained safe
and secure,
taking into
account financial
results and the
capital position?
2. Been a good
bank for
customers taking
into account
customer and
advocacy
performance?
3. Operated in an
environment in
which risk is seen
as part of the way
we work and
think?
4. Operated in a
way that reflects
its stated values?
Evidenced
by
questions
Has NatWest
Group breached
a minimum
capital ratio over
the period?
Analysis
NO
NatWest Group
has remained
well capitalised
since 2017.
Has there been
a material fall in
the NatWest
Group share
price over the
period?
Has Net
Promoter Score
(NPS) fallen
across the
business?
Have there been
indicators of a material
deterioration in the risk
culture or profile, taking
into account annual
assessments by the Risk
function and the BRC?
Has the BSB
survey position
fallen
materially?
Have colleague
engagement
scores fallen
materially?
YES
The share price
has fallen by just
under 40% since
the end of 2017.
YES
NPS has fallen
since 2017 for
three out of the
six targeted
customer areas.
NO
No material deterioration
but expected
improvement to CEC2
rating not consistently
achieved in subsequent
years.
NO
Scores
improved
consistently
since 2017.
NO
Engagement
Index has
increased
steadily since
2017.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Potential underperformance?
YES
Where the answer is ‘Yes’, three further questions have been considered:
1.
Is the underperformance due to factors within management’s reasonable control in the circumstances?
2. Can the underperformance be linked back to the performance year to which the award relates, rather than
3.
performance developments since?
Is it appropriate to reflect the underperformance in the current pre-vest test (i.e. if the underperformance has
not been adequately reflected in other ways such as subsequent pre-grant tests for awards granted in the
interim)?
If the answer to each of these questions is “Yes”, the Committee may decide that a further adjustment prior to
vesting is appropriate, and it has the discretion to decide the amount.
Further analysis
Three areas were investigated - share price, customer and risk with a specific focus on Customer Due Diligence
remediation.
Supported by external opinion, it was concluded that share price underperformance was not due to factors
within management’s reasonable control, given the close correlation in share price performance over the
period with our main competitors.
While NPS had declined in some areas and management’s decisions to close branches had a bearing, this
had already been accounted for through adjustments to LTI awards in subsequent years.
Whilst on risk there had been no material deterioration in risk culture or profile over the period, it was felt
appropriate that consideration of management performance relating to Customer Due Diligence and
associated matters (CDD) should be assessed using the Risk & Control underpin.
NO
Achievement of
‘threshold level of
sustainable
performance’ has
been evidenced.
No adjustment
proposed, subject
to the underpins
below.
Risk & Control and Stakeholder Perception underpins
The underpins provide scope to consider significant risk, stakeholder or reputational matters not already captured in the performance
assessment, taking into account advice from the BRC and the SBC. The underpins can also be used to consider events arising during the
period between grant and the end of year three. Having reviewed the facts relating to management performance with regard to CDD, and
recognising its significance, BRC agreed it would be appropriate for the Committee to consider an adjustment to 2018 LTI vest levels.
NatWest Group Annual Report and Accounts 2020
134
Annual report on remuneration
BRC assessment and recommendation to invoke the Risk & Control underpin
Following a detailed investigation by management, the BRC concluded that there had not been a full appreciation across management of the
scale and complexity of the challenges related to the remediation of CDD during 2017. This had led to issues with the in-year remediation plan
which had not been fully reflected at grant or in subsequent grants. Following the steps above, the BRC recommended that the Committee
consider the application of the Risk & Control underpin for 2018 LTI awards.
RemCo assessment and final outcome
Following the recommendation from the BRC to consider the application of the Risk & Control underpin, it was agreed that the awards of four
individuals holding 2018 LTI awards would be adjusted. Ross McEwan was viewed as having supervisory responsibility for the CDD remediation
plan during 2017 and Alison Rose was considered to have had associated responsibility, in her role as CEO of Commercial and Private Banking
during 2017. Of the two other recipients, one was also considered to have associated responsibility, with the other being considered primarily
responsible for the 2017 plan. The Committee considered at length the differing level of involvement and responsibility for the CDD remediation
programme in 2017 across the four individuals, to ensure fair and proportionate adjustments were made.
Mr McEwan received an LTI award of 592,328 shares in 2018 following the application of the pre-grant performance assessment which resulted
in a reduction of 10% from the maximum award level of 658,142 shares. Under the pre-vest assessment above, a further reduction of 7.5% of
the maximum award was applied using the Risk & Control underpin, resulting in a balance of 542,968 shares. As a member of the Executive
Committee at the time, Ms Rose received a 2018 LTI award of 488,906 shares following the pre-grant test, representing a 13.33% reduction
from the maximum possible award. The Committee and the Board agreed that a further reduction of 5% on Ms Rose’s LTI maximum award level
would be appropriate using the Risk & Control underpin. Applying a slightly lower reduction for Ms Rose compared to Mr McEwan was
considered to be proportionate as while Ms Rose, as a franchise CEO, had associated responsibility for CDD remediation in 2017, Mr McEwan
had supervisory oversight of the in-year remediation plan. Further details on Mr McEwan’s arrangements can be found in the payments to past
directors section.
A summary of the agreed award level for Ms Rose and the estimated vesting value is set out below.
Alison Rose
2018 LTI award
Maximum
shares at grant
564,122
Reduction at
pre-grant test
13.33%
Shares
granted
488,906
Further reduction from
maximum at pre-vest test
5%
Shares to
vest
460,700
Vested
value (1)
£649,586
Note:
(1) Based on a share price of £1.41, the average over the three-month period from October to December 2020.
Pre-grant assessment of performance in 2020 (for LTI awards to be granted in 2021)
For each of the core performance areas, the Committee considers whether the executive director has achieved what would reasonably have
been expected over the performance year prior to grant. The achievement of reasonable or ‘target’ performance expectations can deliver full or
nearly full pay-out of the LTI awards, as long as executives deliver good, sustainable performance. This approach reflects the significantly
reduced level of LTI awards expected to be granted under the company’s LTI construct, in comparison to traditional LTI structures, which is
designed to create more predictable outcomes and encourage safe and secure growth within risk appetite.
The Committee follows a robust process to review performance against pre-set goals relevant to NatWest Group’s strategic aims for that year
but applies its judgement without a formulaic range for vesting or mechanistic weightings. Performance is assessed taking into account
circumstances applying over the period. Risk & Control and Stakeholder Perception underpins also apply under which the Committee can
consider if there are any other factors that would lead to a downwards adjustment. Awards may be reduced, potentially down to zero, further to
the application of either the pre-grant or pre-vest tests where there has been significant underperformance or risk management failings. In line
with feedback received from some shareholders, ratings have been added to the table below to show the extent of under or overperformance.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Core strategic
areas
Scorecard
Financial &
Business
Delivery
Purpose
alignment
Has a
purpose
which delivers
long-term
sustainable
performance
Scorecard
Risk &
Control
Measures and targets to assess pre-grant performance
Performance against targets for 2020
Ratings
Run a safe and secure bank
Achieve NatWest Group cost reduction target of
£250m based on operating expense reduction.
NatWest Group cost savings are £277m and have
exceeded the target.
Achieve CET1 ratio targets of 15% for NatWest Group
and 13.5% for NWH Group, with appropriate
repatriation of capital to the NatWest Group.
NatWest Group CET1 was 18.5% at year end
which exceeded the target, with limited
distributions due to COVID-19 restrictions. NWH
Group was 17.5%. Capital repatriation was
appropriate and all risk appetites have been
considered.
Exceeded
Achieve net loan growth target of >3% for retail and
commercial franchises consisting of Retail Banking,
Ulster, Private, Commercial and RBSI.
Retail and commercial net lending growth was
6.8% for the year, exceeding target and including
lending under UK Government support schemes¹.
Progress towards execution of the NatWest Markets
strategic review, with RWA reduction of £6-8billion and
capital ratio accretive in year 1.
RWA reduction of £11.0bn at year end, which
exceeded the target and was capital accretive.
Maintain a robust control environment
NatWest Group and NWH Group to achieve a control
environment rating of 2, with NatWest Group and
NWH Group change programmes managed and
executed within policy and risk appetite.
Compliance with minimum controls under ring-fencing
rules across NWH Group.
The control environment rating across NatWest
Group and NWH Group remained a 3, meaning
the required target was not attained.
Not met
NatWest Group Annual Report and Accounts 2020
135
Annual report on remuneration
Core strategic
areas
Purpose
alignment
Has a
purpose
which delivers
long-term
sustainable
performance
Scorecard
Customer &
Stakeholder
Purpose
alignment
Honest & fair
with
customers
and suppliers
Measures and targets to assess pre-grant performance
Performance against targets for 2020
Ratings
Material progress towards desired risk culture
Achieve or maintain a ‘systematic’ risk culture rating
which reflects target risk management practices and
behaviours in line with the Enterprise Wide Risk
Management Framework.
Positive progress towards (‘1’) generative with
NatWest Group and NWH Group to be rated (‘2’)
systematic as a minimum.
Meaningful increase in customer advocacy
Targets for top 5 customer journeys prioritised for
2020. NPS improvement of:
8 points for account opening;
4 points for paying a person or bill;
2 points for keeping purchases and payments safe;
8 points for commercial lending; and
3 points for business servicing.
Risk culture has continued to improve with all
except one area of NatWest Group now having
attained a ‘2’ systematic rating. The absence of a
‘2’ rating Group-wide does, however, mean the
target has not been met.
Not met
Partially
met
Customer performance continued to be mixed with
targets being met for 3 out of 5 customer journeys
during 2020.
NPS for Retail Banking customer journeys were 9
points off target for account opening (due to a high
volume of applications in H1 leading to extended
processing times) and 1 point off target for paying
a person or bill. The NPS for keeping purchases
and payments safe exceeded target by 4 points
due to fraud prevention improvements introduced
in March.
NPS for Commercial Banking customer journeys
exceeded target by 3 points for commercial
lending and 2 points for business servicing. Strong
customer performance across Commercial
Banking was attributed to the NatWest Group’s
response to the COVID-19 pandemic. The
commercial lending performance did not include
‘CBILs’ lending but had it done so the associated
NPS target would still have been exceeded by 1
point.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Build trust with our customers
Net trust score improvement of 6 percentage-points
for NatWest (England & Wales) and improvement of
10 percentage-points for Royal Bank of Scotland
(Scotland).
The net trust score improved for NatWest
(England & Wales) but narrowly missed target by
1 point. The net trust score for Royal Bank of
Scotland missed target by 17 points.
Not met
A good citizen
Creation of new businesses
Create an additional 6,500 new businesses, ensuring
everyone has the same opportunity to progress
irrespective of gender, background or geography, with
support being distributed as follows: 75% to the UK
regions outside London & South East, 60% to
females, 20% to Black, Asian and Minority Ethnic
individuals and 10% to people intending to create
purpose-led businesses.
A guardian for
future
generations
To be a leading bank helping to address the
climate challenge
Progress towards climate positive operations by 2025
with reduction in carbon emissions from our direct
operational footprint by 10% in 2020.
NatWest Group Annual Report and Accounts 2020
136
Not met
The COVID-19 pandemic has driven a
fundamental shift in the macroeconomic context
which has meant starting a new business has not
been a priority at this time, with NatWest Group
shifting its focus to supporting surviving and
declining businesses.
In terms of the original 6,500 new business target,
1,926 new businesses were created, with
available data indicating distribution as follows²:
72% to UK regions outside London & South East;
80% to females; 26% to Black, Asian and Minority
Ethnic individuals; and 52% to purpose-led
businesses.
Whilst the original target has not been met, the
shift in the focus to supporting existing customers
has been effective. A revised internal aim of
750,000 value-add customer interventions and
250,000 interventions aimed at helping customers
survive and thrive through the pandemic has been
significantly exceeded with around 6.4m
interventions logged. For the purposes of the LTI
performance assessment, this, however, remains
a miss in terms of the original disclosed target.
The pandemic accelerated progress against the
carbon emissions target, achieving a 33%
reduction in emissions during 2020, made up of a
21% reduction in energy use in our buildings and
a 67% reduction in business travel.
Annual report on remuneration
Core strategic
areas
Measures and targets to assess pre-grant performance
Performance against targets for 2020
Increase new funding and financing for climate and
sustainable finance to £6.5bn in 2020.
NatWest Group will set sector-specific targets for high
impact sectors that are scenario-based for aggregate
balance sheet alignment to the objectives of the 2015
Paris Agreement, and be in a position to publish such
targets at or before the time of the FY2020 results
announcements to give full transparency to all our
stakeholders.
Funding and financing for climate and sustainable
finance totalled c.£12bn, achieving 60% of the
total 2020-22 target.
NatWest Group has developed and will publish in
February 2021: (i) 2019 financed emissions
estimates for four high impact sectors and (ii)
emissions intensity estimates for 2030 and 2050
for three of those four sectors. These emissions
intensity estimates illustrate, based on assumed
scenarios, what the emissions intensities of each
of the three sectors would need to be for NatWest
Group to meet its overall 2030 emissions
reductions and 2050 alignment with the Paris
Agreement. The Bank has chosen to assess Paris
Alignment using estimates rather than targets.
This is because of evolving methodologies, data
refinement and ongoing broader market
engagement work.
Ratings
Met
Build the capability of our colleagues
Exceeded
Scorecard
People &
Culture
NatWest Group and NWH Group achieving capability
targets of 12 points above the Global Financial
Services Norm3 as measured through the ‘Our View’
colleague survey.
The NatWest Group and the NWH Group building
capability scores exceeded the target by 4 points
and 5 points respectively.
Purpose
alignment
A responsible
and
responsive
employer
Build up and strengthen a healthy culture.
NatWest Group and NWH Group achieving the culture
target to be equal to the Banking Standards Board
Norm3 as measured through the ‘Our View’ colleague
survey.
Embed our shared purpose across the business
Achieving the shared purpose target for NatWest
Group and NWH Group, to be 1 point above the
Banking Standards Board Norm as measured through
the ‘Our View’ colleague survey.
A diverse workforce and inclusive environment
To increase the percentage of females in the top three
layers of NatWest Group from 35% to 36% on
aggregate.
To increase the percentage of Black, Asian and
Minority Ethnic UK employees in the top four layers
from 9% to 10% on aggregate.
The NatWest Group and the NWH Group culture
scores exceeded the target by 8 points and 9
points respectively.
The NatWest Group and NWH Group shared
purpose scores each exceeded the target by 5
points.
The percentage of females in the top three layers
of NatWest Group, in aggregate, increased from
35% to 39% during 2020.
The percentage of Black, Asian and Minority
Ethnic UK employees in the top four layers of
NatWest Group, in aggregate, increased from 9%
to 10% during 2020.
Met
Achieving the inclusion target for NatWest Group and
NWH Group, to be 10 points above the Global
Financial Services Norm as measured through the
‘Our View’ colleague survey.
The NatWest Group and the NWH Group inclusion
index scores each exceeded the target by 4
points.
Notes:
(1) Across the retail and commercial businesses net lending increased by £20.9 billion in comparison to 2019 supported by £12.9 billion drawdowns against
UK Government lending schemes and £16.2 billion mortgage lending, including £3.0 billion related to the Metro Bank mortgage portfolio acquisition.
(2) Data only tracked against select initiatives which included those focused on female and social purpose-led entrepreneurs. For 2021 reporting will reflect all
initiatives.
(3) Willis Towers Watson’s Global Financial Services Norm. The Banking Standards Board Norm is based on the average score across all participating banks.
(4) For the CFO, performance was assessed in line with the framework above and the performance of the Finance function was also taken into account.
NatWest Group Annual Report and Accounts 2020
137
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Exceeded
Exceeded
Annual report on remuneration
Outcome of the pre-grant assessment for the 2021 LTI award
The Committee also received advice from the BRC and the SBC in making its final assessment. As part of its ‘performance in the round’
judgement, the Committee noted that targets had been met or exceeded for six of the areas above, one was partially met and four were
missed, albeit narrowly in some cases. Of these areas the resilience of underlying financial performance, despite the exceptionally
challenging environment, and the progress in embedding and demonstrating the Group’s purpose internally and externally were viewed as
having a significant bearing on the overall view of performance. Whilst progress against the enterprise goal fell significantly short of target,
the Committee acknowledged the response had been appropriate in prioritising support to existing customers over new business growth.
Alison Rose
Turning to individual performance, Ms Rose was considered to have had a highly impressive first full year in her CEO role. Despite it being
a remarkably challenging year, an effective launch of the Group’s purpose and her strong leadership and energy through the pandemic had
resulted in an excellent operating performance. There had been effective engagement with key external stakeholders, some progress on
customer scores and good people scores in a difficult year. Underlying financial performance was viewed as very respectable despite the
impact of COVID-19 on results. NatWest Group continued to be behind target on risk measures, although risk culture had continued to
improve. Taking into account performance against the core goals as set out above and the uniquely challenging and unanticipated external
events of 2020, the Committee agreed an LTI award level of £899,000 would be appropriate. This would equate to 82% of salary and 47%
of the maximum LTI award level. This outcome included an exceptional COVID-19 reduction of 38% to reflect the impact of the pandemic
on the wider economic environment and NatWest Group’s performance and affordability, otherwise performance against the pre-set and
unadjusted 2020 performance targets would have resulted in an award level equal to 75% of Ms Rose’s maximum. This is below the long-
term guidance of 80% for assumed average vesting over a CEO’s tenure. The Committee went on to acknowledge that Ms Rose had
informed the Board in April that she did not wish to be considered for an LTI award for 2020 and, therefore, no award will be made.
Katie Murray
Ms Murray’s performance in 2020 was also considered to be strong, with highlights including managing crucial parts of the COVID-19
agenda, especially capital, liquidity and funding plans, and driving annual cost reductions in line with target. There had been improved
management of investor engagement with positive feedback received and Ms Murray had demonstrated excellent leadership and had
made progress on transforming the Finance function and its executive team as well as its inclusion agenda. In light of performance
achieved, the Committee agreed that an LTI award of £682,000 would be appropriate, which equates to 90% of salary and 45% of the
maximum award available. Again, this outcome included an exceptional COVID-19 reduction of 38%, otherwise performance against the
pre-set unadjusted 2020 performance targets would have resulted in an award level equal to 73% of Ms Murray’s maximum. This is also
below the long-term guidance of 80% for assumed average vesting.
Alison Rose
Katie Murray
Maximum award
£1,925,000
£1,500,000
Reduction for
pre-grant performance
£475,000
£400,000
Reduction for
COVID-19 and affordability
£551,000
£418,000
Award level agreed by
Committee (% of max.)
47%
45%
LTI award to be
made in 2021
-
£682,000
Note:
(1) 2021 LTI award for Ms Murray represents a 38% reduction on her 2020 LTI award.
Pre-vest performance assessment for 2021 LTI awards
The pre-vest assessment for LTI awards due to be granted in March 2021 will operate in a similar way to the pre-vest framework in place
for 2018 LTI awards, as described in detail on page 134. In early 2024, the Committee will look back to consider whether anything has
come to light that would indicate that the pre-grant assessment based on the 2020 performance year did not represent a correct view of
performance at that time, thereby requiring a reduction or cancellation in the vesting of the award. Underpins provide scope to consider
significant risk and control, stakeholder or reputational matters not already captured in the performance assessment. Full details of the
assessment will be disclosed prior to the first vesting taking place in 2024.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
138
Annual report on remuneration
Total remuneration for the Chairman and non-executive directors for 2020
There were no changes to the number of Committees during the year. One change was made to the level of fees, with the Chairman of the CAP
receiving a temporary increase from £15,000 to £30,000 per annum to reflect the additional engagement with the workforce as a result of
COVID-19. The increase applies for the period from 1 April 2020 to 31 March 2021. For NatWest Group plc Board directors who also serve on
the boards and committees of NatWest Holdings Limited, National Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank
Limited, the fees below reflect membership of all five boards and their respective board committees. Where appropriate, directors also received
fees for membership of other subsidiary company boards and committees including NatWest Markets Plc, the value of which is included below.
The year on year (YoY) percentage change for fees and benefits has been added below in line with new reporting regulations. Membership of
Board Committees is reviewed regularly and changes in membership will impact the level of fees paid to non-executive directors from one year
to the next. Two directors left during the year which had a further impact and the benefits figures have largely fallen due to there being
significantly less travel in 2020.
Total single figure of remuneration for the Chairman and non-executive directors during 2020
Chairman (composite fee)
Howard Davies
Non-executive directors
Frank Dangeard (3)
Alison Davis (4)
Patrick Flynn
Morten Friis
Robert Gillespie
Yasmin Jetha (4)
Baroness Noakes (4)
Mike Rogers
Mark Seligman
Lena Wilson
Board N&G GAC BRC RemCo SBC
£000 £000
£000
£000
£000
£000
TIC
£000
£000
SID CAP Other
£000
£000
260
20
80
80
80
60
47
80
80
80
15
6
15
68
34
14
34
48
34
9
20
39
15
34
14
8
7
60 18
23
30 60
30
22 30
15
30
45
30
8
26
Fees
2019
£000
750
Fees
2019
£000
260
200
223
148
227
—
205
170
197
155
YoY% 2020
change
—
£000
12
YoY%
change
0
(75)
2
14
(3)
n/a
(44)
0
(4)
16
2020
£000
1
2
3
7
3
—
1
2
1
4
Benefits (1)
2019
YoY%
£000
11
change
9
Benefits (2)
2019
£000
4
24
10
35
19
—
17
12
8
11
YoY%
change
(75)
(92)
(70)
(80)
(84)
n/a
(94)
(83)
(88)
(64)
2020
£000
750
2020
£000
260
50
227
168
221
128
115
170
189
180
Total
2020
£000
762
Total
2020
£000
261
52
230
175
224
128
116
172
190
184
2019
£000
761
2019
£000
264
224
233
183
246
—
222
182
205
166
No variable pay is provided to the Chairman and non-executive directors in line with the Code.
Notes:
(1) The benefits column for Howard Davies, Chairman, includes private medical cover (£11,007) as well as life cover and expenses in connection with attendance
at Board meetings (c.£1,000 in total). In April 2020, the Chairman announced he would donate 25% of his fees for the rest of the year to the NET Coronavirus
Appeal.
(2) Non-executive directors are reimbursed expenses incurred in connection with travel and attendance at Board meetings. These expenses are taxable where the
meetings take place at the company’s main offices and NatWest Group settles the tax on behalf of the non-executive directors.
(3) Under the ‘Other’ column, Frank Dangeard received a composite fee as Chairman of the NatWest Markets Plc (NWM Plc) Board.
(4) Alison Davis and Baroness Noakes stepped down from the Board on 31 March 2020 and 31 July 2020 respectively. Yasmin Jetha re-joined the Board on 1 April
2020 after previously stepping down in 2018 to serve solely as a director of key entities in preparation for the ring-fencing regime.
Key to table:
N&G
GAC
BRC
RemCo
Group Nominations and Governance Committee
Group Audit Committee
Group Board Risk Committee
Group Performance and Remuneration Committee
SBC
TIC
SID
CAP
Group Sustainable Banking Committee
Technology and Innovation Committee
Senior Independent Director
Colleague Advisory Panel
Payments for loss of office
There were no payments for loss of office made to directors in 2020.
Payments to past directors
Ross McEwan stepped down from the Board as CEO in October 2019. The Board agreed that Mr McEwan qualified for good leaver treatment,
as per the requirements in the policy section of this report, in respect of his unvested LTI awards. In line with good leaver status, outstanding LTI
awards granted in 2018, 2019 and 2020 will continue to vest on their scheduled vesting dates and pro‐rating will not apply. All awards remain
subject to a performance assessment prior to vesting and the potential application of malus and clawback provisions.
As set out on page 135, Mr McEwan received an LTI award of 592,328 shares in 2018 which was reduced to 542,968 shares following the pre-
vest assessment and the application of the Risk & Control underpin. The remaining shares are due to vest between 2021 and 2025, subject to
the good leaver criteria continuing to be met and the potential application of malus and clawback provisions. The value of the shares is
£765,585, based on the average share price over October to December 2020. Similar disclosures will be made in future reports for Mr
McEwan’s 2019 and 2020 LTI awards, once the pre-vest assessment has taken place. In addition, Mr McEwan received assistance with his UK
tax return in relation to a tax year during which he was still employed by NatWest Group, with a value of £2,108. There are no other payments to
past directors to disclose for 2020.
NatWest Group Annual Report and Accounts 2020
139
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Annual report on remuneration
Engagement with shareholders
Every year an extensive consultation is undertaken with major shareholders and other stakeholders prior to the Committee making any final
decisions on remuneration and variable pay awards. In late 2020, meetings took place with a number of institutional shareholders, UK
Government Investments (UKGI) and other stakeholders. A range of topics were discussed including the impact of COVID-19 on remuneration
decisions, potential approaches to windfall gains and the disclosure framework for LTI awards.
As part of the discussions on COVID-19, it was explained that NatWest Group had not placed any colleagues on furlough or sought other forms
of government support. Shareholders were interested in the reasons for withdrawing dividend payments during the year and the Committee
Chairman explained that NatWest Group remained very well capitalised, with the decision made at the request of regulators as a precaution. It
was clear from the discussions that windfall gains from LTI awards was a key area of focus, due to the high volatility in share prices, although
views on how such gains should be mitigated were not always aligned across investors. The Committee acknowledged these concerns and a
new framework was established to address potential windfall gains as explained earlier in this report.
Disclosure relating to LTI awards was another theme from the engagement meetings, with feedback that greater clarity on the factors the
Committee had taken into account in exercising its discretion would be welcomed. As a result, the Committee agreed to make two
enhancements to LTI disclosures: inclusion of a ratings system to give some indication of the extent of over or underperformance against the
targets for the current year; and the identification of the measures the Committee is expecting to be priority areas for the performance year
ahead. The intention is to provide shareholders with additional insight on how the Committee viewed performance over the year and which
factors had more of a bearing than others in determining the final outcome. The first disclosures to incorporate these features are included in
this report.
More generally, meetings also take place with retail shareholders allowing Board members to hear directly from the wider shareholder base on
any matters of importance. Three virtual retail shareholder events were held in 2020 providing shareholders with the opportunity to pose
questions to a panel of executives and non-executive directors. Similar events are planned for 2021. Shareholders continue to play a vital role in
developing remuneration practices and the Committee is very grateful for their involvement in the process.
Implementation of remuneration policy in 2021
Details are set out below of remuneration to be awarded in 2021 to executive directors. The salary, benefits, pension and fixed share allowance
for the CEO and CFO are unchanged. The LTI pre-grant assessment has been completed with the Committee making a recommendation to the
Board on the CFO’s LTI award. The Board approved the recommendation, as set out below. Details of the performance measures and
assessment relating to the CEO and CFO LTI awards can be found on pages 135 to 138.
Executive directors’ remuneration to be awarded in 2021
Alison Rose
Katie Murray
Salary
£1,100,000
£750,000
Standard benefits (1)
£26,250
£26,250
Pension (% of salary)
£110,000 (10%)
£75,000 (10%)
Fixed share allowance
100% of salary (2)
£1,100,000
£750,000
Maximum LTI award following pre-grant
assessment over 2020 (4)
-
£682,000
LTI award (3)
£1,925,000
£1,500,000
Notes:
(1) Amount shown relates to standard benefit funding. Executive directors are also entitled to travel assistance and security arrangements in line with the policy.
The value of benefits received will be disclosed each year.
(2) Fixed share allowance payable broadly in arrears, currently in four instalments per year, with shares released in equal amounts over a three-year period.
(3)
If the maximum LTI award was made, the maximum remuneration receivable by the CEO and CFO would increase by £962,500 and £750,000 respectively from
the amounts shown above in the event that there was a 50% increase in the NatWest Group plc share price over the period from grant to vest.
(4) The Committee agreed that, if Ms Rose had not indicated she did not wish to be considered for an award, it would have granted her an LTI award in 2021 of
£899,000, which reflected adjustments for the performance assessment and a further exceptional reduction in light of the impact of COVID-19.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Timing of payments to executive directors
Variable pay
pre-grant
assessment at the
end of 2020 based
on performance
over year
LTI award
granted in
March 2021
further assessment
at the end of three
years before any
vesting takes place
first vesting in
March 2024, then
12-month retention
period applies
20%
20%
Fixed pay
20%
33%
33%
33%
shares released
over three years
Fixed share
allowance
Pension &
benefits
Base salary
20%
20%
shares released over 2025 to
2029 due to a combination of vesting
dates and a 12-month retention
period following each vesting
Year
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Performance Goals for 2021 (for the pre-grant assessment of LTI awards to be made in 2022)
Performance will be assessed across four core areas using a balanced scorecard and with measures that align with NatWest Group’s purpose.
It should be noted that the pre-grant assessment for LTI awards operates over a one-year period based on strategic targets for that year and, in
this respect, it has some similarities to the operation of annual bonus awards rather than traditional long-term incentive awards. Targets are
disclosed in advance where these are not deemed commercially sensitive.
There are no weightings set for the performance categories, however, the Committee follows a robust process to review performance against
pre-set goals, measures and targets with certain ‘priority measures’ having been identified below for 2021. These priority measures will be a key
focus for the Committee as it applies its judgement to the assessment of performance for the year. Full details of the targets and the
assessment of performance against such targets will be set out in next year’s report. Priority measures for 2021 are highlighted in grey shading.
NatWest Group Annual Report and Accounts 2020
140
Annual report on remuneration
Core area and
purpose
Performance Goals
for 2021
Measures for assessing pre-grant performance
leading to 2022 LTI awards
Targets
Scorecard
Financial &
Business
Delivery
Purpose
alignment
Has a purpose
which delivers
long-term
sustainable
performance
Scorecard
Risk & Control
Purpose
alignment
Has a purpose
which delivers
long-term
sustainable
performance
Scorecard
Customer &
Stakeholder
Purpose
alignment
Honest & fair
with customers
and suppliers
Achieve NatWest Group cost reduction target
based on operating expense reduction.
Reduce other expenses, excluding
operating lease depreciation, by around 4%
in comparison to 2020, excluding any
change in the direct cost base of Ulster
Bank RoI.
Achieve CET1 ratio target for NatWest Group and
NWH Group, with appropriate repatriation of
capital to NatWest Group.
Targets will be disclosed as part of the
performance assessment in the 2021
Directors’ remuneration report (DRR).
Run a safe and
secure bank.
Achieve net lending growth target for retail and
commercial franchises consisting of Retail
Banking, Commercial Banking, Private Banking
and RBSI.
Above market rate lending growth across
our UK and RBS International retail and
commercial businesses, excluding UK
Government financial support schemes.
Increase focus on climate lending.
Achieve RoTE target for NatWest Group.
Targets will be disclosed as part of the
performance assessment in the 2021 DRR.
Progress towards execution of the NatWest
Markets strategic review. To be measured with
reference to RWA reduction and capital accretion.
Achieve the majority of the remaining RWA
reduction towards our medium-term target
of £20bn by the end of 2021.
Maintain a robust
control
environment.
Achieve or maintain an effective control
environment rating. Ensure a safe, simple and
smart approach is adopted in the execution of
purpose-led strategic, operating model and cost
change programmes.
NatWest Group and NWH Group to each
achieve a control environment rating of ‘2’,
with documented evidence to support
progress against regulatory responsibilities
and priorities.
Positive progress against regulatory
responsibilities and priorities.
Effective management of compliance with the
ring-fencing rules across NWH Group.
Compliance with minimum controls under
ring-fencing rules.
Achieve or maintain a ‘systematic’ risk culture
rating, as evidenced by intelligent risk taking and
leadership role modelling in line with practices
and behaviours set out in the Enterprise Wide
Risk Management Framework (EWRMF).
NatWest Group and NWH Group to each
achieve a ‘2’ systematic risk culture rating
as a minimum, with key EWRMF milestones
delivered and decisions made through
application of a ‘purpose’ lens.
Achievement of targets across the top 4 customer
journeys to be prioritised in 2021.
Achievement of NPS targets for our core
customer facing businesses.
NPS improvement of:
6 points for NatWest Account Opening or
be 4th or better;
2 points for NatWest Commercial Lending;
2 points for NatWest Day-to-Day Business
Servicing.
Maintain NPS for NatWest Mortgages or be
2nd or better.
NPS improvement of:
1 point for NatWest Retail Main Bank or be
5th or better;
4 points for NatWest Business Banking and
be 3rd or better;
5 points for Mid-Markets NPS or be first by
5 points.
Increase the number of customers who have
saved at least £100.
Help an additional 500,000 customers to
start saving at least £100.
Deliver financial capability interactions that
require active engagement, give knowledge or
skills and change behaviour.
NatWest Group to reach 3.2 million
individuals through agreed financial
capability interactions.
Material progress
towards the desired
risk culture target
where ‘risk is part of
the way we work
and think’.
Meaningful increase
in customer
advocacy for key
customer journeys.
Increase the
likelihood that
customers will
recommend our
brands.
Improve the
financial capability
of our customers,
colleagues and
communities.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
A good citizen
Remove barriers to
UK enterprise
growth.
Support removal of barriers to UK enterprise
growth through provision of learning, networking,
and funding interventions.
Support 35,000 businesses through
enterprise programmes with 200,000
customer interactions to start, run and grow
a business, with support being distributed:
75% to UK regions outside of London
& South East;
60% to females;
20% to Black, Asian and Minority
Ethnic individuals;
10% to people intending to create
purpose-led businesses.
NatWest Group Annual Report and Accounts 2020
141
Annual report on remuneration
Core area and
purpose
Performance Goals
for 2021
Measures for assessing pre-grant performance
leading to 2022 LTI awards
Targets
A guardian for
future
generations
To be a leading
bank helping to
address the climate
challenge.
Progress towards climate positive own operations
by 2025.
Reduce carbon emissions from our direct
operational footprint by 25% of NatWest
Group’s 2019 baseline position.
Funding and financing committed to climate and
sustainable finance.
£8 billion of funding and financing for
climate and sustainable finance in 2021.
Complete initial ‘footprinting’ estimate of total
2019 financed emissions and develop estimates
aligned with the 2015 Paris Agreement.
Complete footprint estimate of 2019 total
financed emissions.
Develop estimates aligned with the 2015
Paris Agreement for a further 4 sectors.
Scorecard
People &
Culture
Build the capability
of our colleagues to
realise their
potential.
Based on achieving the capability targets for
NatWest Group and NWH Group as measured
through the NatWest Group ‘Our View’ colleague
survey.
NatWest Group to be 15 points above and
NWH Group to be 16 points above the
Global Financial Services Norm*.
Purpose
alignment
A responsible
and
responsive
employer
Build up and
strengthen a
healthy culture.
Based on achieving the culture target for NatWest
Group and NWH Group, as measured through
the NatWest Group ‘Our View’ colleague survey.
NatWest Group to be 7 points above and
NWH Group to be 8 points above the
Banking Standards Board Norm*.
Embed our shared
purpose across the
business and
brands.
Based on the Banking Standards Board
assessment and achieving the shared purpose
target for NatWest Group and NWH Group, as
measured through the NatWest Group ‘Our View’
colleague survey.
NatWest Group and NWH Group to be 6
points above the Banking Standards Board
Norm.
Develop a diverse
workforce and
inclusive
environment.
Progress on the number of women in senior roles
across the top three layers of NatWest Group.
To increase the percentage of females in
the top three layers of NatWest Group from
39% to 40% on aggregate.
Progress on the number of Black, Asian and
Minority Ethnic UK employees in the top four
layers of NatWest Group.
To increase the percentage of Black, Asian
and Minority Ethnic UK employees in the
top four layers from 10% to 11% on
aggregate.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Based on achieving the inclusion index target for
NatWest Group and NWH Group, as measured
through the NatWest Group ‘Our View’ colleague
survey.
NatWest Group and NWH Group to be 13
points above the Global Financial Services
Norm.
*Willis Towers Watson’s Global Financial Services Norm. The Banking Standards Board Norm is based on the average score across all participating banks.
For the CFO, performance will be assessed in line with the framework above and the performance of the Finance function will also be taken into account.
Chairman and non-executive directors’ annual fees for 2021
The fees are unchanged from those in place at the end of 2020.
Fees for NatWest Group plc Board (1)
Chairman (composite fee)
Non-executive director basic fee
Senior Independent Director
Fees for NatWest Group plc Board Committees (1)
Group Board Risk Committee
Group Audit Committee
Group Performance and Remuneration Committee
Group Sustainable Banking Committee
Technology and Innovation Committee
Group Nominations and Governance Committee
Other fees for NatWest Group plc Board directors
Chairman of NatWest Markets Plc (composite fee to cover all boards and committees)
Chairman of the Colleague Advisory Panel
Rates from 1 January 2021
£750,000
£80,000
£30,000
Member
£34,000
£34,000
£30,000
£30,000
£30,000
£15,000
January to March 2021
April to December 2021
Chairman
£68,000
£68,000
£60,000
£60,000
£60,000
—
£260,000
£30,000
£15,000
Note:
(1) No additional fees are payable where the director is also a member of the boards and respective board committees of NatWest Holdings Limited, National
Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank Limited. Where appropriate, directors receive additional fees in respect of membership
of other subsidiary company boards and committees including NatWest Markets Plc. The value of fees received will be disclosed in this report each year.
NatWest Group Annual Report and Accounts 2020
142
Annual report on remuneration
Other external directorships
Agreement from the Board must be sought before directors accept any additional roles outside of NatWest Group. Procedures are in place to
make sure that regulatory limits on the number of directorships held are complied with. The Board would also consider whether it was
appropriate for executive directors to retain any remuneration receivable in respect of any new external directorships, taking into account the
nature of the appointment. Details of the directorships held by directors can be found in the biographies section of the Corporate governance
report.
CEO to employee pay ratios
The ratios compare the total remuneration of the CEO, as set out in this report, against the remuneration of the median UK employee as well as
employees at the lower and upper quartiles. A significant proportion of the CEO’s pay is delivered in LTI awards, where awards are linked to
performance and share price movements over the longer term. Therefore, the ratios will depend significantly on LTI outcomes and may fluctuate
from one year to the next. None of the three individuals identified at the 25th, 50th and 75th quartiles this year received LTI awards. The table
also includes ratios based on salary only as well as remuneration values for further comparison.
The pay ratios are reflective of a diverse range of roles and pay levels across NatWest Group as a large financial services company. The
median employee identified for the 2020 comparison works in the Retail Banking division and the median pay ratio is believed to be consistent
with the pay, reward and progression policies for UK employees taken as a whole. For each individual, NatWest Group is committed to paying a
fair rate for the role performed, using consistent reward policies and with opportunities for progression. The steps that NatWest Group takes to
ensure employees are paid fairly are set out earlier in this report. The change in total remuneration ratios since 2018 is largely driven by the
more volatile nature of variable pay for the CEO. An additional factor that caused the ratio to fall in 2020 was the CEO’s decision in April 2020 to
forgo 25% of her fixed pay for the rest of the year with NatWest Group making a comparable donation to the NET Coronavirus Appeal. The
trend based on a comparison of salary only is more stable over the period.
Financial
Year
Methodology
2018
2019
2020
A
A
A
total remuneration
salary only
total remuneration
salary only
total remuneration
salary only
P25
(LQ)
143:1
44:1
175:1
44:1
99:1
46:1
Pay ratios
P50
(Median)
97:1
30:1
118:1
30:1
66:1
31:1
Remuneration values (£000)
P75
(UQ) Calculation
56:1 total remuneration
19:1 salary only
69:1 total remuneration
19:1 salary only
39:1 total remuneration
20:1 salary only
Chief
Executive
3,578
1,000
4,517
1,017
2,615
1,100
Y25
(LQ)
25
23
26
23
26
24
Y50
(Median)
37
33
38
34
40
36
Y75
(UQ)
64
51
66
52
66
54
Supplementary information on pay ratio table:
(1) The data for 2020 is based on remuneration earned by Alison Rose, as set out in the single figure of remuneration table in this report.
(2) The employees at the 25th, 50th and 75th percentiles (lower, median and upper quartile) were determined as at 31 December of the relevant year, based on
(3)
full-time equivalent remuneration for all UK employees. This includes fixed pay (salary, pension funding and where relevant benefit funding and other
allowances) and also any variable pay where the amount to be paid has been used. For employees that work part-time, fixed pay is grossed up to the full-time
equivalent.
‘Option A’ methodology was selected as this is considered the most statistically accurate method under the reporting regulations. UK employees receive a
pension funding allowance set as a percentage of salary. Some employees, but not the CEO, continue to participate in the defined benefit pension scheme
under which it would be possible to recognise a higher value, which would in turn reduce the ratios. However, for simplicity and consistency with regulatory
disclosures, the pension funding allowance value has been included in the calculation for all employees.
(4) The data for the three employees identified has been considered and fairly reflects pay at the relevant quartiles amongst the UK employee population. Each of
the three individuals was a full-time employee during the year and none received an exceptional award which would otherwise inflate their pay figures.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Annual change in directors’ pay compared to average change in employee pay
Under new reporting regulations, it is necessary to show a comparison of the annual change in director pay to the average pay of employees of
the parent company. However, NatWest Group plc is a holding company and is not an employing entity, and therefore the disclosure below is
made on a voluntary basis to compare any change with all employees based in the UK. In each case, remuneration is based on salary, benefits
and annual bonus. The CEO and CFO receive fixed share allowances and are eligible for LTI awards rather than annual bonus. Non-executive
directors receive fixed fees rather than salary and do not receive any variable pay. Fees for Board and Committee attendance have remained
unchanged over the year other than an increase to the Chairman of the Colleague Advisory Panel. Further details on the fees and benefits for
the Chairman and non-executive directors and the percentage change between 2019 and 2020 can be found on page 139.
Annual change 2019 to 2020
Chief Executive Officer (1)
Chief Financial Officer
UK employees (3)
Salary
8.2%
0%
2.86%
Benefits (2)
0%
0%
1.70%
Annual Bonus
n/a
n/a
-32.4%
Notes:
(1) As highlighted in last year’s report, Alison Rose was appointed as CEO on 1 November 2019 on a salary of £1.1m, which was 10% higher than her
predecessor. The change took place towards the end of the year and the table above is based on a full financial year comparison. Part of the 2019 salary
increase was reflected in last year’s table with the remainder shown above. No change has been made to Ms Rose’s salary in 2020.
(2) Standard benefit funding for executive directors remained unchanged between 2019 and 2020. The figure above excludes any other benefits to executive
directors such as travel assistance in connection with company business, the value of which is disclosed each year in the total remuneration table.
(3) The data above is based on full year average salary costs of UK based employees of NatWest Group, excluding the CEO and the CFO. This is considered to be
the most representative comparator group as it covers the majority of employees and the CEO and CFO are based in the UK.
Summary of remuneration levels for employees in 2020
43,144 employees earned total remuneration up to £50,000
12,606 employees earned total remuneration between £50,000 and £100,000
4,813 employees earned total remuneration between £100,000 and £250,000
803 employees earned total remuneration over £250,000
NatWest Group Annual Report and Accounts 2020
143
Annual report on remuneration
Directors’ interests in NatWest Group plc shares and shareholding requirements
The shareholding requirement is to hold shares to the value of 400% of salary for the CEO and 250% of salary for the CFO. A post-employment
shareholding requirement was introduced at the 2020 AGM. Further details can be found in the policy section of this report.
Shareholding requirements
Note:
(1) The calculation is based on a share price of £1.68 as at 31 December 2020. During the year the share price ranged from £0.93 to £2.44.
Share interests held by directors
Alison
Rose
Katie
Murray
Howard
Davies
Frank
Dangeard
Alison
Davis
Patrick
Flynn
Morten
Friis (2)
Robert
Gillespie
Yasmin
Jetha
Baroness
Noakes
Mike
Rogers
Mark
Seligman (3)
Lena
Wilson
Shares held (1)
1,736,350 635,890 100,000
5,000 20,000 20,000 20,000 25,000 30,000 41,000 20,000
30,000 20,000
Notes:
(1) Shares owned beneficially as at 31 December 2020 or date of stepping down from the Board if earlier. The interests shown above include shares held by
persons closely associated with the directors. As at 18 February 2021, there were no changes to the shares held shown above, other than the acquisition of 101
shares by Katie Murray at the end of January 2021 as part of one of the company’s share plans.
(2) The share interest held is over 10,000 American Depositary Receipts representing 20,000 ordinary shares.
(3) 10,000 shares are held in the name of M Seligman & Co Ltd, of which Mr Seligman and Louise Seligman are shareholders.
Share interests under the company’s share plans
Year of
Awards held at
award 1 January 2020
Awards
Award
Awards
Awards lapsed
Awards
Awards held at
granted price £ (1)
vested for performance
forfeited
31 December 2020
Expected vesting dates
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Alison Rose
LTI award 2015
LTI award 2016
LTI award 2017
LTI award 2018
LTI award 2019
LTI award 2020
98,463
201,560
745,589
488,906
568,829
881,679
2,103,347 881,679
3.74
98,463
2.26 100,780
2.41 223,677
2.66
2.64
1.70
298,235
422,920
298,235
Total LTI awards subject to service
Total LTI awards subject to performance and service
Katie Murray
LTI award 2016
Deferred award 2017
LTI award 2017
Sharesave 2017
Deferred award 2018
Sharesave 2018
Deferred award 2019
LTI award 2020
Sharesave 2020
18,285
51,258
103,969
1,585
107,183
1,901
243,812
646,565
3,200
527,993 649,765
Total LTI and deferred awards subject to service
Total LTI awards subject to performance and service
Total Sharesave options
9,143
17,087
26,796
17,424
2.26
2.41
2.41
2.27
2.66
1.89
2.64
1.70
1.12
41,587
1,585
1,901
70,450
41,587
3,486
1,062,235
412,470 (2)
646,565 (3)
3,200 (4)
0
100,780 (2)
223,677 (2)
488,906 (3)
568,829 (3)
881,679 (3)
2,263,871
324,457 (2)
1,939,414 (3)
9,142 (2)
34,171 (2)
62,382 (2)
0 (4)
80,387 (2)
0 (4)
226,388 (2)
646,565 (3)
3,200 (4)
06.03.20
08.03.20 – 08.03.21
07.03.20 – 07.03.24
07.03.21 – 07.03.25
07.03.22 – 07.03.26
07.03.23 – 07.03.27
08.03.20 – 08.03.21
07.03.20 – 07.03.22
07.03.21 – 07.03.22
18.12.2020
07.03.20 – 07.03.23
18.12.2021
07.03.20 – 07.03.26
07.03.23 – 07.03.27
18.12.2023
Notes:
(1) The award price is normally calculated based on the average share price over a period prior to grant.
(2) Performance assessment has taken place and outstanding awards remain subject to deferral periods and employment conditions before vesting. These awards
count on a net of tax basis towards meeting the shareholding requirement.
(3) Awards shown are still subject to the LTI pre-vest performance assessment and also subject to deferral periods and employment conditions before vesting. The
pre-vest assessment of the 2018 LTI award concluded in January 2021, as set out earlier in this report.
(4) Awards granted under the Sharesave plan where colleagues can choose to save from their salary with an option to buy shares at the end of the savings period.
The award price is the option price at which shares can be bought at the end of the savings period. Sharesave options are normally exercisable for a period of
six months from the maturity date.
NatWest Group Annual Report and Accounts 2020
144
Annual report on remuneration
Shareholder dilution and share sourcing
The company can use new issue, market purchase or treasury shares to satisfy the exercise of share options and the vesting of share awards
under its share plans. NatWest Group’s share plans contain best practice dilution limits that govern the number of shares that may be issued to
satisfy share plan awards. Such limits will continue to be monitored.
Total Shareholder Return (TSR) performance
The graph below shows the performance of NatWest Group over the past ten years in terms of TSR compared with that of the companies
comprising the FTSE 100 Index. This index has been selected because it represents a cross-section of leading UK companies. The TSR for
FTSE UK banks for the same period has been added as a further comparison. Source: Datastream
FTSE 100
FTSE UK Banks
R
S
T
NatWest Group
CEO pay over the same period
Total remuneration (£000s) (1)
Annual bonus against
maximum opportunity
LTI vesting rates against
maximum opportunity (2)
250
200
150
100
50
0
2010
AR
RM
SH
SH
AR
RM
SH
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Year end
2011
2012
2013
2014
2015
2016
2017
2018
1,646
1,646
393
1,235
1,878
3,492
3,702
3,487
3,578
0%
0%
0%
n/a
n/a
n/a
n/a
n/a
0%
0%
0%
73%
62%
56%
89%
41%
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
2019
1,401
4,066
n/a
60%
78%
2020
2,615
n/a
82%
Notes:
(1) For 2013 and 2019, the table reflects where more than one individual has served as CEO during the year. The CEOs are Alison Rose (AR), Ross McEwan (RM)
and Stephen Hester (SH) with figures based on the single total figure of remuneration for the relevant year.
(2) The maximum opportunity is set according to the approved policy and, for LTI awards granted in 2015 and onwards, the regulatory cap.
Relative importance of spend on pay
The table below shows a comparison of remuneration expenditure against distributions to ordinary and preference shareholders. A change to
the disclosure from last year is the removal of data on taxation and other charges. This was provided previously for additional context but is not
required under the regulations and the change has been made to align with more standard market practice. Information on taxation payments
made by NatWest Group is still available on natwestgroup.com.
Remuneration paid to all employees (1)
Distributions to holders of ordinary shares (2)
Distributions to holders of preference shares and paid-in equity
2020
£m
3,365
—
381
2019
£m
3,516
3,018
406
Change
-4.29%
n/a
-6.16%
Notes:
(1) Remuneration paid to all employees represents total staff expenses per Note 3 to the Financial Statements, exclusive of social security and other staff costs.
(2) Dividends that were proposed for payment during 2020 were withdrawn in line with regulatory requirements. The Board has confirmed its intention to pay a
dividend of 3p per ordinary share in respect of financial year 2020, which is the maximum amount permitted under current regulatory requirements, subject to
approval by shareholders at the Annual General Meeting on 28 April 2021.
NatWest Group Annual Report and Accounts 2020
145
Annual report on remuneration
Membership of the Group Performance
and Remuneration Committee
All members of the Committee are
independent non-executive directors. In order
to be considered for the role of Committee
Chairman, an individual must first have served
on a remuneration committee for at least 12
months.
The Committee held seven scheduled
meetings in 2020 and a further eight ad hoc
meetings. Details of members and attendance
can be found in the Corporate governance
report on page 100.
The role and responsibilities of the
Committee
The Committee is responsible for:
approving the remuneration policy for all
colleagues and reviewing the effectiveness
of its implementation;
reviewing performance and making
recommendations to the Board on
arrangements for executive directors;
approving performance and remuneration
for a defined ‘in scope’ population
capturing members and attendees of the
Group and NWH Executive Committees,
the direct reports of the CEO and heads of
key legal entities, control function heads
and the Company Secretary. The
Committee also approves arrangements
where individuals earn total compensation
above £1 million; and
setting the remuneration framework and
principles for colleagues identified as
Material Risk Takers (MRTs) falling within
the scope of UK regulatory requirements.
The remuneration policy operated broadly as
intended during the year, with adjustments
made for performance where appropriate. The
Committee reviewed performance for senior
executives and the implementation of the
remuneration policy for all colleagues. The
CEO’s decision to forgo part of her fixed pay
and all of her variable pay for 2020 meant that
total remuneration was lower than envisaged.
Key tasks for the Committee in 2020 included
securing approval from shareholders for the
renewal of the directors’ remuneration policy
and expanding its review of wider workforce
remuneration and fair pay across the
organisation. The Committee also considered
the impact of COVID-19 on remuneration
decisions.
To mitigate potential conflicts of interest,
directors are not involved in decisions
regarding their own remuneration and
remuneration advisers are appointed by the
Committee rather than management.
Attendees also play an important role in
advising the Committee but are not present
when their own remuneration is
discussed. The Group Chief HR Officer may
be present when discussions take place on
senior executive pay, as there is considerable
benefit from her participation, but is never
present for discussions on her remuneration.
The terms of reference of the Committee are
reviewed annually and available on
natwestgroup.com.
Summary of the principal activity in 2020
Tasks undertaken by the Committee included
reviewing and, where appropriate, approving:
First half of 2020
2019 performance assessments and
remuneration arrangements for the
Committee’s ‘in scope’ population.
2020 performance objectives for the ‘in
scope’ population.
Assessments of vesting levels for LTI
awards granted in 2017.
Regulatory updates and submissions.
Total pay spend across the wider
workforce, including analysis by colleague
level, geography and diversity.
The directors’ remuneration policy with
support from shareholders at the AGM.
An enhancement to MRT identification and
reporting for subsidiary entities.
Second half of 2020
A ‘masterclass’ session with SBC to
consider wider workforce remuneration.
Half-year and year-end performance
reviews for the ‘in scope’ population.
Remuneration arrangements for the
departing and incoming members of the
Group’s Executive Committees.
The plan to engage with stakeholders on
remuneration proposals.
Management’s assurance of the
implementation of the Group-wide
remuneration policy.
Fixed pay proposals for the year ahead.
The 2020 Sharesave offer.
2020 variable pay proposals and the 2020
Directors’ remuneration report.
Performance evaluation
The 2020 performance evaluation was
conducted internally by the Chief Governance
Officer and Company Secretary. This was
structured around: operating rhythm; purpose
& priorities; culture & dynamics; and input &
support. The Committee was considered to
have managed well in a difficult year and had
been particularly supportive and responsive to
multiple urgent requests from management.
Ad hoc meetings aside, members agreed the
operating rhythm was appropriate, with the
Committee well sighted on wider workforce
remuneration and also sufficiently engaged on
the impact of COVID-19 on remuneration.
Members continued to see the benefits of the
masterclass, with broad support for annual
joint engagement sessions with the SBC on
areas of mutual interest around the changing
nature of the workforce, diversity and
inclusion and wider workforce remuneration.
Some concerns were expressed over the
granular detail often included within papers.
However, it was acknowledged that this was
principally driven by the heavily regulated
nature of the banking sector.
NatWest Group Annual Report and Accounts 2020
146
There was also a genuine appreciation for the
Committee Chairman’s dedication to the role,
with members noting significant time
commitment required from the Chairman in
liaising with key internal and external
stakeholders in order to deliver the year end
pay process. Actions arising from the
evaluation will be tracked during 2021.
Advisers to the Committee
PricewaterhouseCoopers LLP (PwC) was first
appointed as remuneration adviser by the
Committee in 2010, following a review of
potential advisers and the services provided.
An annual review of the quality of advice and
the associated level of fees was undertaken
during 2020, following which the Committee
agreed to retain the services of PwC. The
Committee will continue to review the
performance of its advisers each year.
PwC is a signatory to the voluntary code of
conduct in relation to remuneration consulting
in the UK. As well as receiving advice from
PwC, the Committee took account at
meetings of the views of the Chairman; the
CEO; the CFO; the Group Chief HR Officer;
the Director of Reward & Employment; and
the Group Chief Risk Officer. The Committee
also received input from the BRC, the GAC
and the SBC. Input was also received from
Performance and Remuneration Committees
for key legal entities across NatWest Group.
PwC provides professional services in the
ordinary course of business including
assurance, advisory, tax and legal advice to
NatWest Group subsidiaries. The Committee
is satisfied that the advice received is
independent and objective, and receives an
annual statement setting out protocols that
have been followed by PwC to maintain
independence. There are no connections
between PwC and individual directors to be
disclosed.
Fees paid to PwC for advising the Committee
are based on a fixed fee structure to cover
standard services with any exceptional items
charged on a time/cost basis. Fees for 2020 in
relation to directors’ remuneration amounted
to £136,830 excluding VAT (2019 - £194,463).
Statement of shareholder voting
The tables below set out the latest resolutions
to approve the directors’ remuneration policy
and the Annual report on remuneration.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Directors’ remuneration policy – 2020
Vote
For
Against
Withheld
No. of shares
39,142,662,676
4,281,775,516
12,426,752
Percentage
90.14%
9.86%
—
Annual report on remuneration – 2020
Vote
For
Against
Withheld
No. of shares
39,241,815,668
4,166,591,108
28,522,020
Percentage
90.40%
9.60%
—
Robert Gillespie
Chairman of the Group Performance and
Remuneration Committee
19 February 2021
Other remuneration disclosures
This section contains a number of disclosures
which are required in accordance with Article
450 of the Capital Requirements Regulation,
the Basel Committee on Banking Supervision
Pillar 3 disclosure requirements and the
European Banking Authority (EBA) guidelines
on sound remuneration policies. This section
should be read in conjunction with the
Directors’ remuneration report starting on
page 119.
Remuneration policy for all colleagues
The remuneration policy supports the
business strategy and is designed to promote
the long-term success of NatWest Group. It
aims to reward the delivery of good
performance provided this is achieved in a
manner consistent with NatWest Group
values and within acceptable risk parameters.
The remuneration policy applies the same
principles to everyone, including MRTs, with
some minor adjustments to the policy where
necessary to comply with local regulatory
requirements. The key elements of the policy
are set out below.
Base salary
The purpose is to provide a competitive level
of fixed cash remuneration.
Operation
Base salaries are reviewed annually and
should reflect the talents, skills and
competencies that the individual brings to the
business.
Role-based allowance
Certain MRT roles receive a role-based
allowance. The purpose is to provide fixed
pay that reflects the skills and experience
required for the role.
Operation
Role-based allowances are fixed allowances
which form an element of overall fixed
remuneration for regulatory purposes and are
based on the role the individual performs.
They are delivered in cash and/or shares
depending on the level of the allowance and
the seniority of the recipient. Shares are
subject to a three-year retention period.
Benefits and pension
The purpose is to provide a range of flexible
and competitive benefits.
Operation
In most jurisdictions, benefits or a cash
equivalent are provided from a flexible
benefits account.
Pension funding forms part of fixed
remuneration and NatWest Group does not
actively provide discretionary pension
benefits.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Annual bonus
The purpose is to support a culture where
individuals recognise the importance of
serving customers well and are rewarded for
superior performance.
Operation
The annual bonus pool is based on a
balanced scorecard of measures including
Financial & Business Delivery, Customer,
People & Culture and Risk & Control
measures. Allocation from the pool depends
on performance of the business area and the
individual.
Individual performance assessment is
supported by a structured performance
management framework. This is designed to
assess performance against longer term
business requirements across a range of
financial and non-financial metrics as well as
an evaluation of adherence to internal controls
and risk management. A balanced scorecard
is used to align with the business strategy.
Each individual will have defined measures of
success appropriate to their role.
Risk and conduct performance is also taken
into account. Control functions are assessed
independently of the business units that they
oversee, with the objectives and remuneration
being set according to the priorities of the
control area, not the targets of the businesses
they support. The Group Chief Risk Officer
and the Chief Audit Executive have the
authority to escalate matters to Board level if
management do not respond appropriately.
Independent control functions exist for key
legal entities outside the ring-fence (NWM Plc
and RBS International), with dual solid
reporting lines into both the legal entity CEO
and the NatWest Group Control Function
Head.
For awards made in respect of the 2020
performance year, immediate cash awards
continue to be limited to a maximum of
£2,000. In line with regulatory requirements, a
significant proportion of annual bonus awards
for more senior roles is deferred and includes
partial delivery in shares.
The deferral period varies from three years for
standard MRTs, rising to five years for
individuals identified as Risk Manager MRTs
and seven years for Senior Managers under
the UK’s Senior Managers Regime. All
awards are subject to malus and clawback
provisions. For MRTs, a minimum of 50% of
any annual bonus is delivered in shares and a
twelve-month retention period will apply post
vesting in line with regulatory requirements.
The fifth Capital Requirements Directive (CRD
V) took effect on 28 December 2020 which
will impact remuneration requirements for the
2021 performance year. This includes
extending the minimum deferral period from
three to four years for MRTs and also some
changes to the criteria for identifying MRTs.
Further details will be included in next year’s
report.
Long-term incentive (LTI) awards
The purpose and operation of LTI awards is
explained in detail in the Directors’
remuneration report. Instead of an annual
bonus, NatWest Group provides executive
directors and certain members of NatWest
Group’s senior executive committees with LTI
awards. Any awards made are subject to a
performance assessment prior to grant and
again prior to vesting.
Shareholding requirements
The requirements promote long-term
alignment between senior executives and
shareholders.
Operation
Executive directors and certain members of
NatWest Group’s senior executive committees
are required to build up and hold a
shareholding equivalent to a percentage of
salary. There is a restriction on the number of
shares that individuals can sell until the
requirement is met.
Company share plans
The purpose is to provide an easy way for
individuals to hold shares in NatWest Group
plc, which helps to encourage long-term
thinking and provides a direct involvement in
NatWest Group’s performance.
Operation
Colleagues in certain jurisdictions are offered
the opportunity to contribute from salary and
acquire shares in NatWest Group plc through
company share plans. This includes
Sharesave and the Buy As You Earn plan in
the UK. Any shares held are not subject to
performance conditions.
Criteria for identifying MRTs
The EBA has issued criteria for identifying
MRT roles, which captures those staff whose
activities have a material influence over
NatWest Group’s performance or risk profile.
The criteria are both qualitative (based on the
nature of the role) and quantitative (for
example those who exceed the stipulated total
remuneration threshold).
In 2019, MRTs were identified for five key
‘institutions’ within NatWest Group but this
has been expanded to eleven entities for 2020
to bring greater focus on MRT identification
across subsidiary entities. The MRT criteria
are applied for each of these institutions, and
consequently some MRTs are identified in
relation to more than one entity.
The qualitative criteria can be summarised as:
staff within the management body; senior
management; other staff with key functional or
managerial responsibilities; and staff who
individually, or as part of a Committee, have
authority to approve new business products or
to commit to credit risk exposures and market
risk transactions above certain levels.
NatWest Group Annual Report and Accounts 2020
147
Other remuneration disclosures
The process considers a balanced scorecard
of performance assessments at the level of
each business area or function, across
financial, customer and people measures.
Risk and conduct assessments at the same
level are then undertaken to ensure that
performance achieved without appropriate
consideration of risk, risk culture and conduct
controls, is not inappropriately rewarded.
BRC reviews any material risk and conduct
events and, if appropriate, an underpin may
be applied to the individual business and
function bonus pools or to the overall bonus
pool. BRC may recommend a reduction of a
bonus pool if it considers that risk and conduct
performance is unacceptable or that the
impact of poor risk management has yet to be
fully reflected in the respective inputs.
Following further review against overall
performance and conduct, and taking into
account input from the CFO on affordability,
the CEO will make a final recommendation to
the Committee, informed by all the previous
steps in the process and her strategic view of
the business. The Committee will then make
an independent decision on the final bonus
pool taking all of these earlier steps into
account.
The assessment process for LTI awards to
executive directors and other recipients is also
founded on a balanced scorecard approach.
The scorecard is aligned with the multi-step
bonus pool process, reflecting a consistent
risk management performance assessment.
Remuneration and culture
NatWest Group continues to assess conduct
and its impact on remuneration as part of the
annual Group-wide bonus pool process and
also via the accountability review framework.
NatWest Group has taken steps in recent
years to remove incentives for colleagues
where this could drive unintended behaviours.
The Committee will continue to review
workforce remuneration and the alignment of
incentives and reward with culture.
The governance of culture is clearly laid out
with Senior Management Function roles
having clearly defined accountabilities, which
is taken into account in their pay decisions.
The Board and SBC also play key roles in
building cultural priorities. Frameworks are in
place to measure progress.
Accountability review process and
malus/clawback
The accountability review process was
introduced in 2012 to identify any material risk
management, control and general policy
breach failures, and to ensure accountability
for those events.
This allows NatWest Group to respond to
instances where new information would
change the variable pay decisions made in
previous years and/or the decisions to be
made in the current year. Potential outcomes
under the accountability review process are:
Malus - to reduce (to zero if appropriate)
the amount of any unvested variable pay
awards prior to payment;
Clawback - to recover awards that have
already vested; and
In-year bonus reductions - to adjust
variable pay that would have otherwise
been awarded for the current year.
As part of the acceptance of variable pay
awards, MRTs must agree to terms that state
that malus and clawback may be applied. Any
variable pay awarded to MRTs in respect of
the 2014 performance year onwards is subject
to clawback for seven years from the date of
grant.
For awards made in respect of the 2016
performance year onwards, this period can be
extended to ten years for MRTs who perform
a ‘senior management function’ under the
Senior Managers Regime where there are
outstanding internal or regulatory
investigations at the end of the normal seven-
year clawback period.
The circumstances in which malus, clawback
or in-year bonus reduction may be applied
can be found on page 130.
During 2020 a number of issues and events
were considered under the accountability
review framework. The outcomes covered a
range of actions including reduction (to zero
where appropriate) of unvested awards
through malus, and suspension of awards
pending further investigation.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
The quantitative criteria are: individuals
earning €500,000 or more in the previous
year; individuals in the top 0.3% of earners of
the relevant legal entity for the previous year;
and individuals who earned more than the
lowest paid identified staff per certain
qualitative criteria. In addition to the qualitative
and quantitative criteria, NatWest Group has
applied its own minimum standards to identify
roles that are considered to have a material
influence over its risk profile.
Personal hedging strategies
The conditions attached to discretionary
share-based awards prohibit the use of any
personal hedging strategies to lessen the
impact of a reduction in value of such awards.
These conditions are explicitly acknowledged
and accepted by recipients when any share-
based awards are granted.
Risk in the remuneration process
NatWest Group’s approach to remuneration
promotes effective risk management through
having a clear distinction between fixed
remuneration, which reflects the role
undertaken by an individual, and variable
remuneration, which is directly linked to
performance and can be risk-adjusted. Fixed
pay is set at an appropriate level to
discourage excessive risk-taking, and at a
level which would allow NatWest Group to pay
zero variable pay.
Focus on risk is achieved through clear risk
input into performance goals, performance
reviews, the determination of variable pay
pools, incentive plan design and the
application of malus and clawback. The
Committee is supported by the BRC and the
Risk function.
A robust process is used to assess risk
performance. A range of measures are
considered, specifically capital, liquidity and
funding risk, credit risk, market risk, pension
risk, compliance & conduct risk, financial
crime, operational risk, business risk and
reputational risk. Consideration is also given
to overall risk culture.
Remuneration arrangements are in line with
regulatory requirements and the steps taken
to ensure appropriate and thorough risk
adjustment are also fully disclosed and
discussed with the PRA and the FCA.
Variable pay determination
For the 2020 performance year, NatWest
Group operated a robust multi-step process,
which is control function led, to assess
performance and determine the appropriate
bonus pool by business area and function. At
multiple points throughout the process,
reference is made to Group-wide business
performance (from both affordability and
appropriateness perspectives) and the need
to distinguish between go-forward and
resolution activities.
NatWest Group Annual Report and Accounts 2020
148
Other remuneration disclosures
Remuneration of MRTs
The quantitative disclosures below are made
in accordance with regulatory requirements in
relation to 1,605 individuals who have been
identified as MRTs for NatWest Group plc
(NatWest Group). The number of MRTs
identified has increased since last year due to
the increase in the number of legal entities for
which MRTs are identified.
Identifying MRTs for additional entities results
in the application of a lower threshold for
certain MRT criteria (including the one relating
to credit risk exposures), because the
threshold to be used (as required by
regulations) is set at 0.5% of the CET1 capital
of each entity. In the course of carrying out
MRT analysis in H1 2020 it was identified that
the Business Approval Authority Framework
used in some areas of the business referred
to NatWest Holdings Limited but was
otherwise silent on legal entity. A prudent
approach was taken, applying the lowest
applicable legal entity threshold to a broad
population, even if the individual had not and
would not be expected to expose that
particular entity to credit risk. This issue and
approach taken was discussed with the PRA.
The Business Approval Authority Framework
was reviewed in Q3 2020 to make this more
legal-entity specific, and as a consequence,
MRT status has been withdrawn for c.600
colleagues from September 2020. However,
these colleagues remain subject to the MRT
remuneration rules (including ‘de minimis’
rules where applicable) and associated
governance for the 2020 performance year.
They will not be MRTs for 2021 and the
expectation is that population will revert to a
more normalised level.
Details of remuneration paid to MRTs
identified for subsidiary institutions is included
in Pillar 3 reporting, which can be found on
natwestgroup.com.
1. Number of MRTs by business area
Senior Other
Number of
mgmt MRTs
beneficiaries
NatWest Group plc EDs
NatWest Group plc NEDs
Corporate Functions
Control Functions
NatWest Holdings
NatWest Markets
RBS International
2
0
9
4
4
1
1
0
11
154
459
740
148
72
Total
2
11
163
463
744
149
73
Total
21
1,584
1,605
One individual is included in the table above
as they have been identified as an MRT in
relation to a role within a subsidiary entity.
However, they do not receive any
remuneration for this role and are not an MRT
in relation to their primary role for NatWest
Group. Therefore, no remuneration is included
for this individual in the remaining tables.
2. Aggregate remuneration expenditure
Aggregate remuneration expenditure in
respect of 2020 performance was as follows:
Aggregate
remuneration
Senior Other
mgmt MRTs
Total
Number of beneficiaries
21
1,583
1,604
NatWest Group plc EDs
NatWest Group plc NEDs
Corporate Functions
Control Functions
NatWest Holdings
NatWest Markets
RBS International
£m
£m
£m
-
4.19
2.53
-
51.11
9.97
5.67
81.09
4.77 110.45
1.72 103.05
9.29
1.24
4.19
2.53
61.08
86.76
115.22
104.77
10.53
Total
27.56 357.52
385.08
Variable remuneration for 2020 performance
Variable remuneration consisted of a
combination of annual bonus and long-term
incentive awards, deferred over a three to
seven year period in accordance with
regulatory requirements. Under the NatWest
Group bonus deferral structure, immediate
cash awards are limited to £2,000 per person.
Long-term incentive awards vest subject to
the extent to which performance conditions
were met and can result in zero payment.
Annual bonus
Senior Other
mgmt MRTs
Total
Number of beneficiaries
8
1,307
1,315
3. Fixed and variable remuneration
Fixed remuneration paid in 2020
Fixed remuneration consisted of salaries,
allowances, pension and benefit funding.
NatWest Group plc EDs
NatWest Group plc NEDs
Corporate Functions
Fixed remuneration
Senior Other
mgmt MRTs
Total
Number of beneficiaries
21
1,583
1,604
NatWest Group plc EDs
NatWest Group plc NEDs
Corporate Functions
Control Functions
NatWest Holdings
NatWest Markets
RBS International
£m
3.51
-
7.26
4.32
3.78
1.16
0.87
£m
-
2.53
41.94
69.97
93.05
73.87
7.71
£m
3.51
2.53
49.20
74.29
96.83
75.03
8.58
Total
20.90 289.07 309.97
Cash remuneration
Deferred bonds
Deferred shares
Control Functions
Cash remuneration
Deferred bonds
Deferred shares
NatWest Holdings
Cash remuneration
Deferred bonds
Deferred shares
NatWest Markets
Cash remuneration
Deferred bonds
Deferred shares
RBS International
Cash remuneration
Deferred bonds
Deferred shares
Total
£m
—
—
0.01
0.27
1.60
0.00
0.05
0.23
0.00
0.03
0.12
£m
—
—
0.19
3.97
5.02
0.71
6.45
3.95
1.35
9.39
6.66
£m
—
—
0.20
4.24
6.62
0.71
6.50
4.18
1.35
9.42
6.78
— 0.21
— 5.31
— 23.66
0.21
5.31
23.66
— 0.13
— 1.28
— 0.17
0.13
1.28
0.17
2.31
68.45
70.76
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Long-term incentives
Senior Other
mgmt MRTs
Number of beneficiaries
8
—
Total
8
NatWest Group plc EDs
NatWest Group plc NEDs
Corporate Functions
Control Functions
NatWest Holdings
NatWest Markets
RBS International
Total
£m
0.68
—
0.83
1.07
0.83
0.56
0.37
4.34
£m
£m
— 0.68
-
—
— 0.83
— 1.07
— 0.83
— 0.56
— 0.37
— 4.34
Definitions for tables
NatWest Group
plc EDs
NatWest Group
plc NEDs
Executive directors of
NatWest Group plc
Non-executive directors of
NatWest Group plc
NatWest Group Annual Report and Accounts 2020
149
Other remuneration disclosures
Total remuneration by band for all
colleagues earning >€1 million
6. Ratio between fixed and variable
remuneration
The variable component of total remuneration
for MRTs at NatWest Group shall not exceed
100% of the fixed component (except where
local jurisdictions apply a lower maximum
ratio for variable pay). The average ratio
between fixed and variable remuneration for
2020 is approximately 1 to 0.30. The majority
of MRTs were based in the UK.
€ million
€1.0 - €1.5
€1.5 - €2.0
€2.0 - €2.5
€2.5 - €3.0
€3.0 - €3.5
€3.5 - €4.0
More than €4.0
Number of employees
2020
42
13
5
3
1
0
0
64
Ratio of fixed to
variable
Senior Other
mgmt MRTs
Total
Total
Number of beneficiaries
16
1,307
1,323
NatWest Group plc EDs
NatWest Group plc NEDs
Corporate Functions
Control Functions
NatWest Holdings
NatWest Markets
RBS International
Consolidated
ratio
ratio
ratio
1:0.43
-
- 1:0.43
-
-
1:0.53 1:0.27 1:0.30
1:0.43 1:0.18 1:0.19
1:0.42 1:0.20 1:0.21
1:0.49 1:0.59 1:0.59
1:0.43 1:0.22 1:0.24
1:0.47 1:0.29 1:0.30
7. Discount Rate
Under CRD IV regulations, a notional discount
is available which allows variable pay to be
awarded at a level that would otherwise
exceed the 1:1 ratio, provided that at least
25% of variable pay is delivered ‘in
instruments’ (shares) and deferred over five
years or more. The discount rate was not
used for remuneration awarded in respect of
the 2020 performance year.
Notes:
(1) Total remuneration in the table above includes
fixed pay, pension and benefit funding and
variable pay.
(2) Where applicable, the table is based on an
average exchange rate of €1.12518 to £1 for
2020.
Colleagues who earned total remuneration of
over €1 million in 2020 represent just 0.1% of
the workforce. These individuals include those
who manage major businesses and functions
with responsibility for significant assets,
earnings or areas of strategic activity and can
be grouped as follows:
The CEOs responsible for each area and
their direct reports.
Those who manage large business areas.
Income generators responsible for high
levels of income including those involved
in managing trading activity and
supporting clients with more complex
financial transactions, including financial
restructuring.
Those responsible for managing balance
sheet and liquidity and funding positions
across the business.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
4. Outstanding deferred remuneration
The table below includes deferred
remuneration awarded or paid out in 2020 in
respect of prior performance years. Deferred
remuneration reduced during the year relates
to long-term incentives lapsed when
performance conditions were not met, long-
term incentives and deferred awards forfeited
on leaving and malus adjustments of prior
year deferred awards and long-term
incentives.
Category of deferred
remuneration
Unvested from prior year
Awarded during year
Paid out (retained)
Paid out (released)
Reduced from prior years
Unvested at year end
Senior Other
mgmt MRTs
£m
£m
Total
£m
34.25 139.31 173.56
12.76 108.68 121.43
49.26
42.32
68.82
68.03
11.21
7.38
35.45 130.26 165.71
6.94
0.79
3.83
5. Guaranteed Awards (including ‘Sign-on’
awards) and Severance Payments
NatWest Group does not offer ‘Sign-on
awards’. Guaranteed awards may only be
granted to new hires in exceptional
circumstances in compensation for awards
forgone in their previous company and are
limited to the first year of service. No new hire
guarantees were made to MRTs in respect of
the 2020 performance year.
Severance payments and/or arrangements
can be made to colleagues who leave
NatWest Group in certain situations, including
redundancy. Such payments are calculated by
a pre-determined formula set out within the
relevant social plans, policies, agreements or
local laws. Where local laws permit, there is a
cap on the maximum amount that can be
awarded.
No severance payments in excess of
contractual payments, local policies,
standards or statutory amounts were made to
MRTs during the year, other than payments to
four individuals of £50,000; £50,000; €55,836;
and £460,000. The two non-standard
payments of £50,000 related to enhanced
outplacement support, one of which was to a
senior management MRT. The two other
payments were made to MRTs in commercial
settlement of potential legal proceedings
related to the termination of their respective
employment.
Severance payments do not reward failure or
misconduct in line with regulatory
requirements. Where required, remuneration
is constrained within the limit of variable to
fixed remuneration in accordance with EBA
guidelines.
NatWest Group Annual Report and Accounts 2020
150
Compliance report
Statement of compliance
NatWest Group plc is committed to high
standards of corporate governance, business
integrity and professionalism in all its
activities.
Throughout the year ended 31 December
2020, NatWest Group plc has applied the
Principles and complied with all of the
Provisions of the UK Corporate Governance
Code issued by the Financial Reporting
Council dated July 2018 (the ‘Code’) except in
relation to:
Provision 17, in respect of the requirement
that the Group Nominations and
Governance Committee should ensure
plans are in place for orderly succession to
both the board and senior management
positions and oversee the development of
a diverse pipeline for succession; and
Provision 33 that the Group Performance
and Remuneration Committee (Group
RemCo) should have delegated
responsibility for setting remuneration for
the Chairman and executive directors.
In respect of Provision 17, the Board
considers this is a matter of significant
importance which should rightly be reserved
for the full Board. Adopting this approach
ensures that all directors have an opportunity
to contribute to succession planning
discussions for Board and senior
management, in support of achieving an
appropriate balance of skills, experience,
knowledge and diversity at senior levels within
NatWest Group and on the Board. It also
means that all directors have an opportunity to
review, consider and become familiar with the
next generation of executive leaders.
In respect of Provision 33, the Board also
considers that this is a matter which should
rightly be reserved for the Board and this is an
approach the Board has adopted for a number
of years. Remuneration for the executive
directors is first considered by the Group
RemCo which then makes recommendations
to the Board for consideration. This approach
allows all non-executive directors, and not just
those who are members of the Group RemCo,
to participate in decisions on the executive
directors’ and the Chairman’s remuneration
and also allows the executive directors to
input to the decision on the Chairman’s
remuneration. The Board believes this
approach is very much in line with the spirit of
the Code and no director is involved in
decisions regarding his or her own
remuneration. A copy of the Code can be
found at www.frc.org.uk.
The Board does not anticipate any changes to
its approach on these aspects of the Code.
Further information on how NatWest Group
plc has applied the Principles, and complied
with the Provisions, of the Code can be found
in the Governance section of this Report,
which includes cross-references to relevant
sections of the Strategic Report and other
related disclosures.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group plc has also implemented the
recommendations arising from the Walker
Review and complied in all material respects
with the Financial Reporting Council Guidance
on Audit Committees issued in September
2012 and April 2016.
Under the US Sarbanes-Oxley Act of 2002,
specific standards of corporate governance
and business and financial disclosures and
controls apply to companies with securities
registered in the US. NatWest Group plc
complies with all applicable sections of the US
Sarbanes-Oxley Act of 2002, subject to a
number of exceptions available to foreign
private issuers.
Internal control
The Board of Directors is responsible for the
system of internal controls that is designed to
maintain effective and efficient operations,
compliant with applicable laws and
regulations. The system of internal controls is
designed to manage, or mitigate, risk to an
acceptable residual level rather than eliminate
it entirely. Systems of internal control can only
provide reasonable and not absolute
assurance against material misstatement,
fraud or loss.
Ongoing processes for the identification,
evaluation and management of the principal
risks faced by NatWest Group operated
throughout the period from 1 January 2020 to
19 February 2021, the date the directors
approved the Annual Report and Accounts.
These included the semi-annual Control
Environment Certification process, which
requires senior members of the executive and
management to assess the adequacy and
effectiveness of their internal control
frameworks and certify that their business or
function is compliant with the requirements of
Sarbanes-Oxley Section 404 and the UK
Corporate Governance Code Section C2.
Policies are in place to govern these
processes. Reports on internal controls
arising from them are reviewed by the Board
and meet the requirements of the Financial
Reporting Council’s Guidance On Risk
Management Internal Control & Related
Financial & Business Reporting.
NatWest Group operates a three lines of
defence model, which provides a framework
for responsibilities and accountabilities across
the organisation. As part of its second line of
defence role, the Risk function oversees and
challenges the firm-wide management of risk
and the efficacy of the related controls. In
addition, the Risk function is responsible for
developing material risk policies and strategic
frameworks for the business to use.
The effectiveness of NatWest Group’s internal
controls is reviewed regularly by the Board,
the Group Audit Committee and the Board
Risk Committee.
The Internal Audit function undertakes
independent assurance activities and provides
reports to the Board and executive
management on the quality and effectiveness
of governance, risk management and internal
controls to monitor, manage and mitigate risks
in achieving the bank’s objectives. In addition,
the Board receives a risk management report
at each scheduled Board meeting. Executive
management committees in each of NatWest
Group’s businesses also receive regular
reports on significant risks facing their
business and how these are being controlled.
Details of the bank’s approach to risk
management are given in the Risk & Capital
Management section of the Annual Report
and Accounts.
While several planned activities designed to
enhance the control environment were
disrupted by the extensive impact of COVID-
19 (thereby delaying the achievement of the
NatWest Group’s control environment target),
the control environment remained largely
stable in 2020. There was continuing
management focus on the delivery of
regulatory programmes – including the
internal transformation programme
established in response to updated IRB
regulation from the Prudential Regulatory
Authority (PRA) and the European Banking
Authority (EBA) – as well as a review of the
controls and processes relating to certain
regulatory reporting. There was also
significant focus on work to enhance controls
relating to financial crime risks – including
ongoing work to strengthen customer due
diligence standards. The focus of the of
NatWest Group in establishing and
maintaining a robust risk culture made a
valuable contribution to the overall control
environment.
The remediation of known control issues
remained a focus of the Group Audit
Committee and the Board Risk Committee
during 2020. For further information on their
oversight of remediation of the most
significant issues, please refer to the Report
of the Group Audit Committee and the Report
of the Board Risk Committee. The Group
Audit Committee has received confirmation
that management has taken, or is taking,
action to remedy significant failings or
weaknesses identified through NatWest
Group’s control framework. The Group Audit
Committee and the Board Risk Committee will
continue to focus on such remediation activity,
particularly in view of the transformation
agenda.
While not being part of the Group’s system of
internal control, the Group’s independent
auditors present to the Group Audit
Committee reports that include details of any
significant internal control deficiencies they
have identified. Further, the system of internal
controls is also subject to regulatory oversight
in the UK and overseas. Additional details of
regulatory oversight are given in the Risk &
Capital Management section.
NatWest Group Annual Report and Accounts 2020
151
(iv) The NYSE standards require that the
compensation committee of a listed company
be composed entirely of independent
directors. Although the members of the Group
RemCo are deemed independent in
compliance with the provisions of the Code,
the Board has not assessed the
independence of the members of the Group
RemCo and Group RemCo has not assessed
the independence of any compensation
consultant, legal counsel or other adviser, in
each case, in accordance with the
independence tests prescribed by the NYSE
Standards. The NYSE Standards require that
the compensation committee must have direct
responsibility to review and approve the
CEO’s remuneration. As stated at the start of
this Compliance report, in the case of
NatWest Group plc, the Board rather than the
Group RemCo reserves the authority to make
the final determination of the remuneration of
the CEO.
(v) The NYSE Standards require listed
companies to adopt and disclose corporate
governance guidelines. Throughout the year
ended 31 December 2020, NatWest Group
plc has complied with all of the provisions of
the Code (subject to the exception described
above) and the Code does not require
NatWest Group plc to disclose the full range
of corporate governance guidelines with which
it complies.
(vi) The NYSE Standards require listed
companies to adopt and disclose a code of
business conduct and ethics for directors,
officers and employees, and promptly disclose
any waivers of the code for directors or
executive officers. NatWest Group has
adopted a code of conduct which is
supplemented by a number of key policies
and guidance dealing with matters including,
among others, anti-bribery and corruption,
anti-money laundering, sanctions,
confidentiality, inside information, health,
safety and environment, conflicts of interest,
market conduct and management records.
This code of conduct applies to all officers and
employees and is fully aligned to the PRA and
FCA Conduct Rules which apply to all
directors. The Code of Conduct is available to
view on NatWest Group’s website at
natwestgroup.com.
This Compliance report forms part of the
Corporate governance report and the Report
of the directors.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
Compliance report
Internal control over financial reporting
NatWest Group plc is required to comply with
Section 404 of the US Sarbanes-Oxley Act of
2002 and assess the effectiveness of internal
control over financial reporting as of 31
December 2020.
NatWest Group has assessed the
effectiveness of its internal control over
financial reporting as of 31 December 2020
based on the criteria set forth by the
Committee of Sponsoring Organizations of the
Treadway Commission in the 2013 publication
of ‘Internal Control - Integrated Framework'.
Based on its assessment, management has
concluded that, as of 31 December 2020,
NatWest Group’s internal control over
financial reporting is effective.
NatWest Group’s auditors have audited the
effectiveness of NatWest Group’s internal
control over financial reporting and have given
an unqualified opinion.
Management's report on NatWest Group’s
internal control over financial reporting will be
filed with the Securities and Exchange
Commission as part of the 2020 Annual
Report on Form 20-F.
Disclosure controls and procedures
As required by Exchange Act rules,
management (including the Group CEO and
Group CFO) have conducted an evaluation of
the effectiveness and design of NatWest
Group’s disclosure controls and procedures
(as defined in the Exchange Act rules) as at
31 December 2020. Based on this evaluation,
management (including the Group Chief
Executive Officer and Chief Financial Officer)
concluded that NatWest Group plc’s
disclosure controls and procedures were
effective as of the end of the period covered
by this annual report.
Changes in internal control
There was no change in NatWest Group’s
internal control over financial reporting that
occurred during the period covered by this
report that has materially affected, or is
reasonably likely to materially affect, NatWest
Group’s internal control over financial
reporting.
The New York Stock Exchange
As a foreign private issuer with American
Depository Shares representing ordinary
shares, preference shares and debt securities
listed on the New York Stock Exchange (the
NYSE), NatWest Group plc is not required to
comply with all of the NYSE governance
standards applicable to US domestic
companies (the NYSE Standards) provided
that it follows home country practice in lieu of
the NYSE Standards and discloses any
significant ways in which its corporate
governance practices differ from the NYSE
Standards.
NatWest Group plc is also required to provide
an Annual Written Affirmation to the NYSE of
its compliance with the mandatory applicable
NYSE Standards. In March 2020 NatWest
Group plc submitted its most recent Annual
Written Affirmation to the NYSE, and in
August 2020 an interim written affirmation was
submitted following a change in membership
of the Group Audit Committee. Both
affirmations confirmed NatWest Group plc’s
full compliance with the applicable provisions.
The Group Audit Committee fully complies
with the mandatory provisions of the NYSE
Standards (including by reference to the rules
of the Exchange Act) that relate to the
composition, responsibilities and operation of
audit committees. More detailed information
about the Group Audit Committee and its work
during 2020 is set out in the Group Audit
Committee report on pages 107 to 111.
The Board has reviewed its corporate
governance arrangements and is satisfied that
these are consistent with the NYSE
Standards, subject to the following
departures:
(i) NYSE Standards require the majority of the
Board to be independent. The NYSE
Standards contain different tests from the
Code for determining whether a director is
independent. NatWest Group plc follows the
Code’s requirements in determining the
independence of its directors and currently
has 8 independent non-executive directors,
one of whom is the senior independent
director.
(ii) The NYSE Standards require non-
management directors to hold regular
sessions without management present, and
that independent directors meet at least once
a year. The Code requires the Chairman to
hold meetings with non-executive directors
without the executives present and non-
executive directors are to meet without the
Chairman present at least once a year to
appraise the Chairman’s performance and
NatWest Group plc complies with the
requirements of the Code.
(iii) The NYSE Standards require that the
nominating/corporate governance committee
of a listed company be composed entirely of
independent directors. The Chairman of the
Board is also the Chairman of the Group
Nominations and Governance Committee,
which is permitted under the Code (since the
Chairman was considered independent on
appointment). The terms of reference of the
Group Nominations and Governance
Committee differ in certain limited respects
from the requirements set out in the NYSE
Standards, including because the Group
Nominations and Governance Committee
does not have responsibility for overseeing
the evaluation of management.
NatWest Group Annual Report and Accounts 2020
152
Report of the directors
The directors present their report together
with the audited accounts for the year ended
31 December 2020.
Other information incorporated into this report
by reference can be found at:
Page/Note
2
57
Strategic report
Our Colleagues
Climate-related
financial disclosures
Stakeholders engagement
Governance at a glance
Section 172 (1) statement
Viability statement
Business review
Board of directors and secretary
Corporate governance
Segmental analysis
Share Capital and other equity
Post balance sheet events
Risk factors
69
46
65
48
67
84
97
99
Note 4
Note 21
Note 33
345
Group structure
During 2018 in preparation for ring-fencing a
number of changes were made to the
NatWest Group structure. Following these
changes the company owns three main
subsidiaries, NatWest Holdings Limited (the
parent of the ring-fenced group which includes
National Westminster Bank Plc, The Royal
Bank of Scotland plc and Ulster Bank Ireland
DAC), NatWest Markets Plc (the investment
bank and the parent of NatWest Markets N.V.)
and The Royal Bank of Scotland International
(Holdings) Limited (the parent of The Royal
Bank of Scotland International Limited).
Further details of the principal subsidiary
undertakings are shown in Note 9 and a full
list of subsidiary undertakings and overseas
branches is shown in Note 12 of the parent
company accounts.
Following placing and open offers in
December 2008 and in April 2009, HM
Treasury (HMT) owned approximately 70.3%
of the enlarged ordinary share capital of the
company. In December 2009, the company
issued a further £25.5 billion of new capital to
HMT in the form of B shares. HMT sold 630
million of its holding of the company’s ordinary
shares in August 2015. In October 2015 HMT
converted its entire holding of 51 billion B
shares into 5.1 billion new ordinary shares of
£1 each in the company. HMT sold a further
925 million of its holding of the company’s
ordinary shares in June 2018.
At 31 December 2020, HMT’s holding in the
company’s ordinary shares was 61.9%.
Activities
NatWest Group is engaged principally in
providing a wide range of banking and other
financial services. Further details of the
organisational structure and business
overview of NatWest Group, including the
products and services provided by each of its
operating segments and the markets in which
they operate are contained in the Business
review. Details of the strategy for delivering
the company’s objectives can be found in the
Strategic report.
Results and dividends
UK company law provides that dividends can
only be paid if a company has sufficient
distributable profits available to cover the
dividend. A company’s distributable profits are
its accumulated, realised profits not previously
distributed or capitalised, less its
accumulated, realised losses not previously
written off in a reduction or re-organisation of
capital.
The loss attributable to the ordinary
shareholders of NatWest Group plc for the
year ended 31 December 2020 amounted to
£753 million compared with a profit of £3,133
million for the year ended 31 December 2019,
as set out in the consolidated income
statement on page 258.
In 2019 NatWest Group paid an interim
dividend of £241 million, or 2.0p per ordinary
share (2018 - £241 million, or 2.0p per
ordinary share) and a special dividend of
£1,449 million, or 12.0p per ordinary share
(2018 – nil). In addition, the company had
announced that the directors had
recommended a final dividend of £364 million,
or 3.0p per ordinary share (2018 – £422
million, or 3.5p per ordinary share), and a
further special dividend of £606 million, or
5.0p per ordinary share (2018 £904 million, or
7.5p per ordinary share), both of which were
subject to shareholders’ approval at the AGM
on 29 April 2020.
In response to a formal request from the
Prudential Regulatory Authority, the Board
cancelled the final ordinary and special
dividend payments in relation to the 2019
financial year and did not submit them for
approval at the AGM held on 29 April 2020.
The company has announced that the
directors have recommended a final dividend
of £364 million, or 3p per ordinary share (2019
– nil). The final dividend recommended by
directors is subject to shareholders’ approval
at the AGM on 28 April 2021.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
If approved, payment will be made on 4 May
2021 to shareholders on the register at the
close of business on 26 March 2021. The ex-
dividend date will be 25 March 2021.
Subject to above mentioned condition, the
payment of interim dividends on ordinary
shares is at the discretion of the Board.
Going concern
NatWest Group’s business activities and
financial position, the factors likely to affect its
future development and performance and its
objectives and policies in managing the
financial risks to which it is exposed and its
capital are discussed in the Business review.
The risk factors which could materially affect
NatWest Group’s future results are set out on
pages 345 to 362. NatWest Group’s
regulatory capital resources and significant
developments in 2020 and anticipated future
developments are detailed in the Capital,
liquidity and funding section on pages 213 to
228. This section also describes NatWest
Group’s funding and liquidity profile, including
changes in key metrics and the build up of
liquidity reserves.
Having reviewed NatWest Group’s forecasts,
projections and other relevant evidence, the
directors have a reasonable expectation that
the Group will continue in operational
existence for a period of not less than twelve
months. Accordingly, the financial statements
of NatWest Group and of the company have
been prepared on a going concern basis.
UK Finance disclosure code
NatWest Group plc’s 2020 financial
statements have been prepared in compliance
with the principles set out in the Code for
Financial Reporting Disclosure published by
the British Bankers' Association in 2010. The
Code sets out five disclosure principles
together with supporting guidance. The
principles are that NatWest Group and other
major UK banks will provide high quality,
meaningful and decision-useful disclosures;
review and enhance their financial instrument
disclosures for key areas of interest to market
participants; assess the applicability and
relevance of good practice recommendations
to their disclosures, acknowledging the
importance of such guidance; seek to
enhance the comparability of financial
statement disclosures across the UK banking
sector; and clearly differentiate in their annual
reports between information that is audited
and information that is unaudited.
Enhanced Disclosure Task Force (EDTF)
and Disclosures on Expected Credit
Losses (DECL) Taskforce
recommendations
The EDTF, established by the Financial
Stability Board, published its report
‘Enhancing the Risk Disclosures of Banks’ in
October 2012, with an update in November
2015 covering IFRS 9 expected credit losses
(ECL). The DECL Taskforce, jointly
established by the Financial Conduct
Authority, Financial Reporting Council and the
Prudential Regulatory Authority, published its
phase 2 report recommendations in
December 2019.
NatWest Group Annual Report and Accounts 2020
153
Report of the directors
NatWest Group plc’s 2020 Annual Report and
Accounts and Pillar 3 Report reflect EDTF and
have regard to DECL Taskforce
recommendations.
Authority to repurchase shares
At the Annual General Meeting in 2020
shareholders authorised the company to
make market purchases of up to
1,209,390,919 ordinary shares. The directors
have not exercised this authority to date.
Shareholders will be asked to renew this
authorisation at the Annual General Meeting
in 2021.
On 6 February 2019 the company held a
General Meeting and shareholders approved
a special resolution to give the company
authority to make off-market purchases of up
to 4.99 per cent of its ordinary share capital in
issuance from HM Treasury (or its nominee)
at such times as the Directors may determine
is appropriate. Full details of the proposal are
set out in the Circular and Notice of General
Meeting available on natwestgroup.com. This
authority was renewed at the 2020 Annual
General Meeting and Shareholders will be
asked to renew this authorisation at the
Annual General Meeting in 2021.
Additional information
Where not provided elsewhere in the Report
of the directors, the following additional
information is required to be disclosed by Part
6 of Schedule 7 to the Large and Medium-
sized Companies and Groups (Accounts and
Reports) Regulations 2008.
The rights and obligations attached to the
company’s ordinary shares and preference
shares are set out in our Articles of
Association, copies of which can be obtained
from Companies House in the UK or can be
found at natwestgroup.com. Non-cumulative
preference share details are set out in Note
21 of the consolidated accounts.
The cumulative preference shares represent
less than 0.008% of the total voting rights of
the company, the remainder being
represented by the ordinary shares.
On a show of hands at a General Meeting of
the company, every holder of ordinary shares
and cumulative preference shares, present in
person or by proxy and entitled to vote, shall
have one vote.
On a poll, every holder of ordinary shares or
cumulative preference shares present in
person or by proxy and entitled to vote, shall
have four votes for every share held. The
notices of Annual General Meetings and
General Meetings specify the deadlines for
exercising voting rights and appointing a
proxy or proxies to vote in relation to
resolutions to be passed at the meeting.
There are no restrictions on the transfer of
ordinary shares in the company other than
certain restrictions which may from time to
time be imposed by laws and regulations (for
example, insider trading laws). At the 2018
Annual General Meeting, shareholders gave
authority to directors to offer a scrip dividend
alternative on any dividend paid up to the
conclusion of the Annual General Meeting in
2021. Shareholders will be asked to renew
this authority at the Annual General Meeting
in 2021. Pursuant to the UK Listing Rules,
certain employees of the company require the
approval of the company to deal in the
company’s shares.
The rules governing the powers of directors,
including in relation to issuing or buying back
shares and their appointment, are set out in
our Articles of Association. It will be proposed
at the 2021 Annual General Meeting that the
directors’ authorities to allot shares under the
Companies Act 2006 (the Companies Act) be
renewed. The Articles of Association may only
be amended by a special resolution at a
general meeting of shareholders. The
company is not aware of any agreements
between shareholders that may result in
restrictions on the transfer of securities and/or
voting rights. There are no persons holding
securities carrying special rights with regard to
control of the company. A number of the
company’s employee share plans include
restrictions on transfers of shares while
shares are subject to the plans. Note 3 sets
out a summary of the plans.
Under the rules of certain employee share
plans, voting rights are exercised by the
Trustees of the plan on receipt of participants’
instructions. If a participant does not submit
an instruction to the Trustee no vote is
registered.
For shares held in the company’s other
Employee Share Trusts, the voting rights are
exercisable by the Trustees. However, in
accordance with investor protection
guidelines, the Trustees abstain from voting.
The Trustees would take independent advice
before accepting any offer in respect of their
shareholdings for the company in a takeover
bid situation. The Trustees have chosen to
waive their entitlement to the dividend on
shares held by the Trusts.
A change of control of the company following
a takeover bid may cause a number of
agreements to which the company is party to
take effect, alter or terminate. All of the
company’s employee share plans contain
provisions relating to a change of control. In
the context of the company as a whole, these
agreements are not considered to be
significant.
Directors
The names and brief biographical details of
the current directors are shown on pages 97
and 98.
Howard Davies, Frank Dangeard,, Patrick
Flynn, Morten Friis, Robert Gillespie, Katie
Murray, Mike Rogers, Alison Rose, Mark
Seligman and Lena Wilson all served
throughout the year and to the date of signing
of the financial statements.
Yasmin Jetha was appointed on 1 April 2020
Alison Davis resigned from the Board on 31
March 2020. Baroness Noakes resigned from
the Board on 31 July 2020.
All directors of the company are required to
stand for election or re-election annually by
shareholders at the Annual General Meeting
and, in accordance with the UK Listing Rules,
the election or re-election of independent
directors requires approval by all shareholders
and also by independent shareholders.
Directors’ interests
The interests of the directors in the shares of
the company at 31 December 2020 are shown
on page 144. None of the directors held an
interest in the loan capital of the company or
in the shares or loan capital of any of the
subsidiary undertakings of the company,
during the period from 1 January 2020 to 18
February 2021.
Directors’ indemnities
In terms of section 236 of the Companies Act,
Qualifying Third Party Indemnity Provisions
have been issued by the company to its
directors, members of the NatWest Group and
NWH Executive Committees, individuals
authorised by the PRA/FCA, certain directors
and/or officers of NatWest Group subsidiaries
and all trustees of NatWest Group pension
schemes.
Controlling shareholder
In accordance with the UK Listing Rules, the
company has entered into an agreement with
HM Treasury (the ‘Controlling Shareholder’)
which is intended to ensure that the
Controlling Shareholder complies with the
independence provisions set out in the UK
Listing Rules. The company has complied
with the independence provisions in the
relationship agreement and as far as the
company is aware the independence and
procurement provisions in the relationship
agreement have been complied with in the
period by the controlling shareholder.
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
154
Report of the directors
Shareholdings
The table below shows shareholders that
have notified NatWest Group that they hold
more than 3% of the total voting rights of the
company at 31 December 2020.
Solicitor For
The Affairs of
Her Majesty’s
Treasury as
Nominee for
Her Majesty’s
Treasury
Ordinary
shares
Number
of
shares
(millions)
% of
share
class
held
% of
total
voting
rights
held
7,509
61.91
61.91
As at 18 February 2021, there were no
changes to the shareholdings shown in the
table above.
Listing Rule 9.8.4
The information to be disclosed in the Annual
Report and Accounts under LR 9.8.4, is set
out in this Directors’ report with the exception
of details of contracts of significance under LR
9.8.4 (10) and (11) given in Additional
Information on page 363.
Political donations
At the Annual General Meeting in 2020,
shareholders gave authority under Part 14 of
the Companies Act 2006, for a period of one
year, for the company (and its subsidiaries) to
make political donations and incur political
expenditure up to a maximum aggregate sum
of £100,000. This authorisation was taken as
a precaution only, as the company has a
longstanding policy of not making political
donations or incurring political expenditure
within the ordinary meaning of those words.
During 2020, NatWest Group made no
political donations, nor incurred any political
expenditure in the UK or EU and it is not
proposed that NatWest Group’s longstanding
policy of not making contributions to any
political party be changed. Shareholders will
be asked to renew this authorisation at the
Annual General Meeting in 2021.
Directors’ disclosure to auditors
Each of the directors at the date of approval of
this report confirms that:
(a) so far as the director is aware, there is no
relevant audit information of which the
company’s auditors are unaware; and
(b) the director has taken all the steps that
he/she ought to have taken as a director to
make himself/herself aware of any relevant
audit information and to establish that the
company’s auditors are aware of that
information.
This confirmation is given and should be
interpreted in accordance with the provisions
of section 418 of the Companies Act.
Auditors
Ernst & Young LLP (EY LLP) are the auditors
and have indicated their willingness to
continue in office. A resolution to re-appoint
EY LLP as the company’s auditors will be
proposed at the forthcoming Annual General
Meeting.
By order of the Board
Jan Cargill
Company Secretary
19 February 2021
NatWest Group plc
is registered in Scotland No. SC45551
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
155
Statement of directors’ responsibilities
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 247 to 257.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required to prepare Group accounts, and
as permitted by the Companies Act 2006 have elected to prepare company accounts, for each financial year in accordance with international
accounting standards in conformity with the requirements of the Companies Act 2006 and with international financial reporting standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. They are responsible for preparing accounts that
present fairly the financial position, financial performance and cash flows of NatWest Group. In preparing those accounts, the directors are
required to:
select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent; and
state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the
accounts.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position
of NatWest Group and to enable them to ensure that the Annual Report and Accounts complies with the Companies Act 2006. They are also
responsible for safeguarding the assets of NatWest Group and hence for taking reasonable steps for the prevention and detection of fraud and
other irregularities.
The directors confirm that to the best of their knowledge:
the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a
true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the
consolidation taken as a whole; and
the Strategic report and Directors’ report (incorporating the Business review) include a fair review of the development and performance of the
business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of
the principal risks and uncertainties that they face.
In addition, the directors are of the opinion that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and
provide the information necessary for shareholders to assess the company’s position and performance, business model and strategy.
By order of the Board
Howard Davies
Chairman
19 February 2021
Board of directors
Chairman
Howard Davies
Alison Rose-Slade
Group Chief Executive Officer
Katie Murray
Group Chief Financial Officer
Executive directors
Alison Rose
Katie Murray
Non-executive directors
Frank Dangeard
Patrick Flynn
Morten Friis
Robert Gillespie
Yasmin Jetha
Mike Rogers
Mark Seligman
Lena Wilson
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
NatWest Group Annual Report and Accounts 2020
156
Risk and capital management
Presentation of information
Update on COVID-19
Risk management framework
Introduction
Culture
Governance
Risk appetite
Identification and measurement
Mitigation
Testing and monitoring
Stress testing
Credit risk
Definition, sources of risk and key developments
Governance and risk appetite
Identification and measurement
Mitigation
Assessment and monitoring and problem debt management
Forbearance
Impact of COVID-19
Impairment, provisioning and write-offs
Significant increase in credit risk and asset lifetimes
Economic loss drivers and UK economic uncertainty
Measurement uncertainty and ECL sensitivity analysis
Banking activities
Trading activities
Capital, liquidity and funding risk
Definitions and sources of risk
Capital, liquidity and funding management
Key points
Minimum requirements
Measurement
Market risk
Non-traded market risk
Traded market risk
Market risk – linkage to balance sheet
Pension risk
Compliance & conduct risk
Financial crime risk
Climate-related risk
Operational risk
Model risk
Reputational risk
Page
157
157
157
157
158
160
160
161
161
161
165
165
165
165
166
167
168
169
171
173
178
180
209
213
214
216
217
218
229
236
239
240
240
241
242
243
244
245
Presentation of information
Where indicated by a bracket in the margins, certain information in the
Risk and capital management section (pages 157 to 245) is within the
scope of the Independent auditor’s report.
Update on COVID-19
The unprecedented challenge posed by the global pandemic – for
families, businesses and governments around the world – also led to a
number of significant risk management challenges. NatWest Group
remained committed to supporting its customers while operating safely
and soundly in line with its strategic objectives. Most notably, the credit
risk profile was heightened due to deteriorating economic conditions.
NatWest Group provided a significant level of payment holidays during
the crisis, and facilitated a high volume of loans through the UK
government CBILS, CLBILS and BBLS initiatives. This is detailed in
the Credit risk section.
In addition, NatWest Group’s operational risk profile became
heightened due to the need to adapt working methods and practices to
large-scale working from home and the requirement to respond to the
crisis – and provide customer support – at pace.
As a result of its strong balance sheet and prudent approach to risk
management, NatWest Group remains well placed to withstand the
impacts of the pandemic as well as providing support to customers
when they need it most.
Risk management framework
Introduction
NatWest Group operates an enterprise wide risk management
framework, which is centred around the embedding of a strong risk
culture. The framework ensures the governance, capabilities and
methods are in place to facilitate risk management and decision-
making across the organisation.
The framework ensures that NatWest Group’s principal risks – which
are detailed in this section – are appropriately controlled and
managed. In addition, there is a process to identify and manage top
risks, which are those which could have a significant negative impact
on NatWest Group’s ability to meet its strategic objectives. A
complementary process operates to identify emerging risks. Both top
and emerging risks are reported to the Board on a regular basis
alongside reporting on the principal risks.
Risk appetite, supported by a robust set of principles, policies and
practices, defines the levels of tolerance for a variety of risks and
provides a structured approach to risk-taking within agreed
boundaries.
All NatWest Group colleagues share ownership of the way risk is
managed, working together to make sure business activities and
policies are consistent with risk appetite.
The methodology for setting, governing and embedding risk appetite is
being further enhanced with the aim of revising current risk appetite
processes and increasing alignment with strategic planning and
external threat assessments.
Culture
Culture is at the centre of both the risk management framework and
risk management practice. NatWest Group’s risk culture target is to
make risk part of the way employees work and think.
A focus on leaders as role models and action to build clarity, develop
capability and motivate employees to reach the required standards of
behaviour are key to achieving the risk culture target. Colleagues are
expected to:
Take personal responsibility for understanding and proactively
managing the risks associated with individual roles.
Respect risk management and the part it plays in daily work.
Understand the risks associated with individual roles.
Align decision-making to NatWest Group’s risk appetite.
Consider risk in all actions and decisions.
Escalate risks and issues early; taking action to mitigate risks and
learning from mistakes and near-misses.
Challenge others’ attitudes, ideas and actions.
Report and communicate risks transparently.
The target risk culture behaviours are embedded in Our Standards and
are clearly aligned to the core values of “serving customers”, “working
together”, “doing the right thing” and “thinking long term”. These act as
an effective basis for a strong risk culture because Our Standards are
used for performance management, recruitment and development.
Training
A wide range of learning, both technical and behavioural, is offered
across the risk disciplines. This training can be mandatory, role-
specific or for personal development and enables colleagues to
develop the capabilities and confidence to manage risk effectively.
Our Code
NatWest Group’s conduct guidance, Our Code, provides direction on
expected behaviour and sets out the standards of conduct that support
the values. The code explains the effect of decisions that are taken
and describes the principles that must be followed.
These principles cover conduct-related issues as well as wider
business activities. They focus on desired outcomes, with practical
guidelines to align the values with commercial strategy and actions.
The embedding of these principles facilitates sound decision-making
and a clear focus on good customer outcomes.
If conduct falls short of NatWest Group’s required standards, the
accountability review process is used to assess how this should be
reflected in pay outcomes for those individuals concerned. The
NatWest Group remuneration policy ensures that the remuneration
arrangements for all employees reflect the principles and standards
prescribed by the PRA rulebook and the FCA handbook. Any
employee falling short of the expected standards would also be subject
to internal disciplinary policies and procedures. If appropriate, the
relevant authority would be notified.
NatWest Group Annual Report and Accounts 2020
157
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Risk management framework continued
Governance
Committee structure
The diagram shows NatWest Group plc’s risk committee structure in 2020 and the main purposes of each committee.
NatWest Group plc Board
Considers material risks and approves, as appropriate, actions recommended by the Group Board Risk Committee.
Monitors performance against risk appetite. Reviews and approves the risk appetite framework and qualitative
statements of risk appetite for all key risks.
Group Board Risk
Committee
Provides oversight and
advice to the Board on
current and future risk
exposures, risk profile, risk
appetite and risk culture.
Reviews the design and
implementation of the risk
management framework and
provides input to
remuneration decisions.
Group Audit
Committee
Assists the Board in carrying
out its accounting, internal
control and financial reporting
responsibilities. Reviews the
effectiveness of internal
controls systems relating to
financial management and
compliance with financial
reporting, asset safeguarding
and accounting laws.
Group Executive Risk
Committee(1)
Reviews, challenges and
debates all material risk and
control matters across the
Group. Supports the CEO and
other accountable executives in
approval of the risk management
framework, agrees executive
approved risk appetite measures
and discharges other risk
management accountabilities.
Group Executive
Committee(2)
Supports the Group CEO in
discharging her individual
accountabilities including matters
relating to strategy, financials,
capital, risk and operational issues.
Monitors the implementation of
culture change. Supports the
Group CEO in forming
recommendations to the Board
and relevant board committees.
Group Asset &
Liability Management
XX Committee(3, 4)
Supports the Group CFO in
overseeing the effective
management of the Group’s
current and future balance
sheet in line with Board-
approved strategy and
risk appetite.
Group Executive
Disclosure Committee(5)
Ensures that NatWest Group and
relevant subsidiary disclosures
are accurate, complete and fair.
Supports the Group CRO in
reviewing and evaluating all
significant expected credit losses
and the Group CFO in reviewing
and evaluating related provisions
and valuations.
.
Notes:
(1) The Group Executive Risk Committee is chaired by the Group Chief Executive Officer and supports her (and other accountable executives) in discharging risk
management accountabilities.
(2) The Group Executive Committee is chaired by the Group Chief Executive Officer and supports her in discharging her individual accountabilities in accordance
with the authority delegated to her by the Board.
(3) The Group Asset & Liability Management Committee is chaired by the Group Chief Financial Officer and supports her in discharging her individual
(4)
accountabilities relating to treasury and balance sheet management.
In addition, the Group Technical Asset & Liability Management Committee, chaired by the Group Treasurer, provides oversight of capital and balance sheet
management in line with approved risk appetite under normal and stress conditions. Reviews and challenges the financial strategy, risk management, balance
sheet and remuneration and policy implications of the Group’s pension schemes.
(5) The Group Executive Disclosure Committee is chaired by the Group Chief Financial Officer and supports her in discharging her accountabilities relating to the
production and integrity of the Group’s financial information and disclosures.
NatWest Group Annual Report and Accounts 2020
158
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Risk management framework continued
Risk management structure
The diagram shows NatWest Group’s risk management structure in 2020 and key risk management responsibilities.
Group
Chief Risk
Officer
Leads the NatWest Group Risk function. Defines and delivers the
risk, conduct, compliance and financial crime strategies. Defines
overall risk service provision requirements to enable delivery of
NatWest Group strategies, including policies, governance,
frameworks, oversight and challenge, risk culture and risk
reporting. Contributes to the developments of strategy,
transformation and culture as a member of the Executive
Committee.
NWH
Chief Executive
Officer
NWH
Chief Risk
Officer
Leads the NWH Risk function. Responsibilities include policy,
governance, frameworks, oversight and challenge, risk culture and
reporting. Delivers risk services across NatWest Group governed
by appropriate service level agreements. Contributes to NWH
strategy as a member of the NWH Executive Committee.
Group
Chief Executive
Officer
RBS Chief
Executive
NWM
Chief Executive
Officer
NWM
Chief Risk
Officer
Leads the NWM Risk function. Responsibilities include policy,
governance, frameworks, oversight and challenge, risk culture and
reporting. Contributes to NWM strategy as a member of the NWM
Executive Committee.
RBSI
Chief Executive
Officer
RBSI
Chief Risk
Officer
Leads the RBSI Risk function. Responsibilities include policy,
governance, frameworks, oversight and challenge, risk culture and
reporting. Contributes to RBSI strategy as a member of the RBSI
Executive Committee.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Notes:
(1)
(2)
(3)
(4)
(5)
The Group Chief Executive Officer also performs the NWH Chief Executive Officer role.
The Group Chief Risk Officer also performs the NWH Chief Risk Officer role.
The NWH Risk function provides risk management services across NWH, including to the NWH Chief Risk Officer and – where agreed – to NWM and RBSI
Chief Risk Officers. These services are managed, as appropriate, through service level agreements.
The NWH Risk function is independent of the NWH customer-facing franchises and support functions. Its structure is divided into three parts (Directors of Risk,
Specialist Risk Directors and Chief Operating Officer) to facilitate effective management of the risks facing NWH. Risk committees in the customer businesses
and key functional risk committees oversee risk exposures arising from management and business activities and focus on ensuring that these are adequately
monitored and controlled. The Directors of Risk, (Retail Banking; Commercial Banking; wealth businesses; Financial & Strategic Risk; Non-Financial Risk &
Frameworks and Compliance & Conduct) as well as the Director, Financial Crime Risk NatWest Holdings and the Chief Operating Officer report to the NWH
Chief Risk Officer. The Director of Risk, Ulster Bank Ireland DAC reports to the Ulster Bank Ireland DAC Chief Executive. He also has a reporting line to the
NWH Chief Risk Officer and to the Chair of the Ulster Bank Ireland DAC Board Risk Committee.
The Chief Risk Officers for NWM and RBSI have dual reporting lines into the Group Chief Risk Officer and the respective Chief Executive Officers of their
entities. There are additional reporting lines to the NWM and RBSI Board Risk Committee chairs and a right of access to the respective Risk Committees.
NatWest Group Annual Report and Accounts 2020
159
Risk and capital management
Risk management framework continued
Three lines of defence
NatWest Group uses the industry-standard three lines of defence
model to articulate accountabilities and responsibilities for managing
risk. It supports the embedding of effective risk management
throughout the organisation. All roles below the CEO sit within one of
these three lines. The CEO ensures the efficient use of resources and
the effective management of risks as stipulated in the risk
management framework and is therefore considered to be outside the
three lines of defence principles.
First line of defence
The first line of defence incorporates most roles in NatWest Group,
including those in the customer-facing franchises, Technology and
Services as well as support functions such as Human Resources,
Legal and Finance.
The first line of defence is empowered to take risks within the
constraints of the risk management framework and policies as well
as the risk appetite statements and measures set by the Board.
The first line of defence is responsible for managing its direct risks.
With the support of specialist functions such as Legal, HR and
Technology, it is also responsible for managing its consequential
risks by identifying, assessing, mitigating, monitoring and reporting
risks.
Second line of defence
The second line of defence comprises the Risk function and is
independent of the first line.
The second line of defence is empowered to design and maintain
the risk management framework and its components. It undertakes
proactive risk oversight and continuous monitoring activities to
confirm that NatWest Group engages in permissible and
sustainable risk-taking activities.
The second line of defence advises on, monitors, challenges,
approves, escalates and reports on the risk-taking activities of the
first line, ensuring that these are within the constraints of the risk
management framework and policies as well as the risk appetite
statements and measures set by the Board.
Third line of defence
The third line of defence is the Internal Audit function and is
independent of the first and second lines.
The third line of defence is responsible for providing independent
and objective assurance to the Board, its subsidiary legal entity
boards and executive management on the adequacy and
effectiveness of key internal controls, governance and the risk
management in place to monitor, manage and mitigate the key
risks to NatWest Group and its subsidiary companies achieving
their objectives.
The third line of defence executes its duties freely and objectively
in accordance with the Institute of Internal Auditors’ Code of Ethics
& Standards.
Risk appetite
Risk appetite defines the level and types of risk NatWest Group is
willing to accept, within risk capacity, in order to achieve strategic
objectives and business plans. It links the goals and priorities to risk
management in a way that guides and empowers staff to serve
customers well and achieve financial targets.
Strategic risks are those that threaten the safety and soundness of
NatWest Group or its ability to achieve strategic objectives. For certain
strategic risks, risk capacity defines the maximum level of risk NatWest
Group can assume before breaching constraints determined by
regulatory capital and liquidity requirements, the operational
environment, and from a conduct perspective. Establishing risk
capacity helps determine where risk appetite should be set, ensuring
there is a buffer between internal risk appetite and NatWest Group’s
ultimate capacity to absorb losses.
Risk appetite framework
The risk appetite framework bolsters effective risk management by
promoting sound risk-taking through a structured approach, within
agreed boundaries. It also ensures emerging risks and risk-taking
activities that might be out of appetite are identified, assessed,
escalated and addressed in a timely manner.
To facilitate this, a detailed annual review of the framework is carried
out. The review includes:
Assessing the adequacy of the framework when compared to
internal and external expectations.
Ensuring the framework remains effective and acts as a strong
control environment for risk appetite.
Assessing the level of embedding of risk appetite across the
organisation.
The Board approves the risk appetite framework annually.
Establishing risk appetite
In line with NatWest Group’s risk appetite framework, risk appetite is
maintained across NatWest Group through risk appetite statements.
The risk appetite statements provide clarity on the scale and type of
activities that can be undertaken in a manner that is easily conveyed to
staff.
Risk appetite statements consist of qualitative statements of appetite
supported by risk limits and triggers that operate as a defence against
excessive risk-taking. They are established at NatWest Group-wide
level for all strategic risks and material risks, and at legal entity,
business, and function level for all other risks.
The annual process of establishing risk appetite statements is
completed alongside the business and financial planning process. This
ensures plans and risk appetite are appropriately aligned.
The Board sets risk appetite for the most material risks to help ensure
NatWest Group is well placed to meet its priorities and long-term
targets even in challenging economic environments. It is the basis on
which NatWest Group remains safe and sound while implementing its
strategic business objectives.
NatWest Group’s risk profile is frequently reviewed and monitored and
management focus is concentrated on all strategic risks, material risks
and emerging risk issues. Risk profile relative to risk appetite is
reported regularly to the Board and senior management.
Risk controls and their associated limits are an integral part of the risk
appetite approach and a key part of embedding risk appetite in day-to-
day risk management decisions. A clear tolerance for material risk
types is set in alignment with business activities.
NatWest Group policies directly support the qualitative aspects of risk
appetite. They ensure that appropriate controls are set and monitored.
Identification and measurement
Identification and measurement within the risk management process
comprise:
Regular assessment of the overall risk profile, incorporating market
developments and trends, as well as external and internal factors.
Monitoring of the risks associated with lending and credit
exposures.
Assessment of trading and non-trading portfolios.
Review of potential risks in new business activities and processes.
Analysis of potential risks in any complex and unusual business
transactions.
The financial and non-financial risks that NatWest Group faces are
detailed in the Risk Directory. This provides a common risk language
to ensure consistent terminology is used across NatWest Group. The
Risk Directory is subject to annual review. This ensures that it
continues to provide a comprehensive and meaningful list of the
inherent risks within NatWest Group.
NatWest Group Annual Report and Accounts 2020
160
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
The process for stress testing consists of four broad stages:
Define
scenarios
Assess
impact
Calculate
results and
assess
implications
Develop and
agree
management
actions
Identify specific vulnerabilities and risks.
Define and calibrate scenarios to examine
risks and vulnerabilities.
Formal governance process to agree
scenarios.
Translate scenarios into risk drivers.
Assess impact to current and projected P&L
and balance sheet.
Impact assessment captures input across
NatWest Group.
Aggregate impacts into overall results.
Results form part of the risk management
process.
Scenario results are used to inform business
and capital plans.
Scenario results are analysed by subject
matter experts. Appropriate management
actions are then developed.
Scenario results and management actions
are reviewed and agreed by senior
committees, including the Executive Risk
Committee, the Board Risk Committee and
the Board.
Stress testing is used widely across NatWest Group. The diagram
below summarises key areas of focus.
Risk and capital management
Risk management framework continued
Mitigation
Mitigation is an important aspect of ensuring that risk profile remains
within risk appetite. Risk mitigation strategies are discussed and
agreed within NatWest Group.
When evaluating possible strategies, costs and benefits, residual risks
(risks that are retained) and secondary risks (those that are due to risk
mitigation actions) are considered. Monitoring and review processes
are in place to evaluate results. Early identification, and effective
management of changes in legislation and regulation are critical to the
successful mitigation of compliance and conduct risk. The effects of all
changes are managed to ensure the timely achievement of
compliance. Those changes assessed as having a high or medium-
high impact are managed more closely. Significant and emerging risks
that could affect future results and performance are reviewed and
monitored. Action is taken to mitigate potential risks as and when
required. Further in-depth analysis, including the stress testing of
exposures relative to the risk, is also carried out.
Testing and monitoring
Targeted credit risk, compliance & conduct risk and financial crime risk
activities are subject to testing and monitoring to confirm to both
internal and external stakeholders – including the Board, senior
management, the customer-facing businesses, Internal Audit and
NatWest Group’s regulators – that policies and procedures are being
correctly implemented and operating adequately and effectively.
Selected key controls are also reviewed. Thematic reviews and deep
dives are also carried out where appropriate.
The adequacy and effectiveness of selected key controls owned and
operated by the second line of defence are also tested (with a
particular focus on credit risk controls). Selected controls within the
scope of Section 404 of the US Sarbanes-Oxley Act 2002, as well as
selected controls supporting risk data aggregation and reporting, are
also reviewed.
Anti-money laundering, sanctions, anti-bribery and corruption and tax
evasion processes and controls are also tested and monitored. This
helps provide an independent understanding of the financial crime
control environment, whether or not controls are adequate and
effective and whether financial crime risk is appropriately identified,
managed and mitigated.
The Risk Testing & Monitoring Forum and methodology ensures a
consistent approach to all aspects of the second-line review activities.
The forum also monitors and validates the annual plan and ongoing
programme of reviews.
Stress testing
Stress testing – capital management
Stress testing is a key risk management tool and a fundamental
component of NatWest Group’s approach to capital management. It is
used to quantify and evaluate the potential impact of specified
changes to risk factors on the financial strength of NatWest Group,
including its capital position.
Stress testing includes:
Scenario testing, which examines the impact of a hypothetical
future state to define changes in risk factors.
Sensitivity testing, which examines the impact of an incremental
change to one or more risk factors.
NatWest Group Annual Report and Accounts 2020
161
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Capital allocation
NatWest Group has mechanisms to allocate capital across its legal
entities and businesses. These aim to optimise the use of capital
resources taking into account applicable regulatory requirements,
strategic and business objectives and risk appetite. The framework for
allocating capital is approved by the Asset & Liability Management
Committee.
Governance
Capital management is subject to substantial review and governance.
The Board approves the capital plans, including those for key legal
entities and businesses as well as the results of the stress tests
relating to those capital plans.
Stress testing – liquidity
Liquidity risk monitoring and contingency planning
A suite of tools is used to monitor, limit and stress test the risks on the
balance sheet. Limit frameworks are in place to control the level of
liquidity risk, asset and liability mismatches and funding
concentrations. Liquidity risks are reviewed at significant legal entity
and business levels daily, with performance reported to the Asset &
Liability Management Committee on a regular basis. Liquidity
Condition Indicators are monitored daily. This ensures any build-up of
stress is detected early and the response escalated appropriately
through recovery planning.
Internal assessment of liquidity
Under the liquidity risk management framework, NatWest Group
maintains the Individual Liquidity Adequacy Assessment Process. This
includes assessment of net stressed liquidity outflows under a range of
severe but plausible stress scenarios. Each scenario evaluates either
an idiosyncratic, market-wide or combined stress event as described in
the table below.
Type
Description
Idiosyncratic
scenario
The market perceives NatWest Group to be suffering
from a severe stress event, which results in an
immediate assumption of increased credit risk or
concerns over solvency.
Market-wide
scenario
A market stress event affecting all participants in a
market through contagion, potential counterparty
failure and other market risks. NatWest Group is
affected under this scenario but no more severely
than any other participants with equivalent exposure.
Combined
scenario
This scenario models the combined impact of an
idiosyncratic and market stress occurring at once,
severely affecting funding markets and the liquidity of
some assets.
NatWest Group uses the most severe outcome to set the internal
stress testing scenario which underpins its internal liquidity risk
appetite. This complements the regulatory liquidity coverage ratio
requirement.
Risk and capital management
Risk management framework continued
Specific areas that involve capital management include:
Strategic financial and capital planning – by assessing the impact
of sensitivities and scenarios on the capital plan and capital ratios.
Risk appetite – by gaining a better understanding of the drivers of,
and the underlying risks associated with, risk appetite.
Risk monitoring – by monitoring the risks and horizon scanning
events that could potentially affect NatWest Group’s financial
strength and capital position.
Risk mitigation – by identifying actions to mitigate risks, or those
that could be taken, in the event of adverse changes to the
business or economic environment. Key risk mitigating actions are
documented in NatWest Group’s recovery plan.
Reverse stress testing is also carried out in order to identify
circumstances that may lead to specific, defined outcomes such as
business failure. Reverse stress testing allows potential vulnerabilities
in the business model to be examined more fully.
Capital sufficiency – going concern forward-looking view
Going concern capital requirements are examined on a forward-
looking basis – including as part of the annual budgeting process – by
assessing the resilience of capital adequacy and leverage ratios under
hypothetical future states. These assessments include assumptions
about regulatory and accounting factors (such as IFRS 9). They are
linked to economic variables and impairments and seek to
demonstrate that NatWest Group and its operating subsidiaries
maintain sufficient capital. A range of future states are tested. In
particular, capital requirements are assessed:
Based on a forecast of future business performance, given
expectations of economic and market conditions over the forecast
period.
Based on a forecast of future business performance under adverse
economic and market conditions over the forecast period.
Scenarios of different severity may be examined.
The examination of capital requirements under normal economic and
adverse market conditions enables NatWest Group to determine
whether its projected business performance meets internal and
regulatory capital requirements.
The examination of capital requirements under adverse economic and
market conditions is assessed through stress testing. The results of
stress tests are not only used widely across NatWest Group but also
by the regulators to set specific capital buffers. NatWest Group takes
part in stress tests run by regulatory authorities to test industry-wide
vulnerabilities under crystallising global and domestic systemic risks.
Stress and peak-to-trough movements are used to help assess the
amount of capital NatWest Group needs to hold in stress conditions in
accordance with the capital risk appetite framework.
Internal assessment of capital adequacy
An internal assessment of material risks is carried out annually to
enable an evaluation of the amount, type and distribution of capital
required to cover these risks. This is referred to as the Internal Capital
Adequacy Assessment Process (ICAAP). The ICAAP consists of a
point-in-time assessment of exposures and risks at the end of the
financial year together with a forward-looking stress capital
assessment. The ICAAP is approved by the Board and submitted to
the PRA.
The ICAAP is used to form a view of capital adequacy separately to
the minimum regulatory requirements. The ICAAP is used by the PRA
to assess NatWest Group’s specific capital requirements through the
Pillar 2 framework.
NatWest Group Annual Report and Accounts 2020
162
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Risk management framework continued
Stress testing – recovery and resolution planning
The NatWest Group recovery plan explains how NatWest Group and
its subsidiaries – as a consolidated group – would identify and respond
to a financial stress event and restore its financial position so that it
remains viable on an ongoing basis.
Scenario analysis based on hypothetical adverse scenarios is
performed on non-traded exposures as part of the Bank of England
and European Banking Authority stress exercises. NatWest Group
also produces an internal scenario analysis as part of its financial
planning cycles.
The recovery plan ensures risks that could delay the implementation of
a recovery strategy are highlighted and preparations are made to
minimise the impact of these risks. Preparations include:
Developing a series of recovery indicators to provide early warning
of potential stress events.
Clarifying roles, responsibilities and escalation routes to minimise
uncertainty or delay.
Developing a recovery playbook to provide a concise description of
the actions required during recovery.
Detailing a range of options to address different stress conditions.
Appointing dedicated option owners to reduce the risk of delay and
capacity concerns.
The plan is intended to enable NatWest Group to maintain critical
services and products it provides to its customers, maintain its core
business lines and operate within risk appetite while restoring NatWest
Group’s financial condition. It is assessed for appropriateness on an
ongoing basis and is updated annually. The plan is reviewed and
approved by the Board prior to submission to the PRA each year.
Individual recovery plans are also prepared for NatWest Holdings
Limited, NatWest Markets Plc, RBS International (Holdings) Limited,
Ulster Bank Ireland DAC and NatWest Markets N.V.. These plans
detail the recovery options, recovery indicators and escalation routes
for each entity.
Fire drill simulations of possible recovery events are used to test the
effectiveness of NatWest Group and individual legal entity recovery
plans. The fire drills are designed to replicate possible financial stress
conditions and allow senior management to rehearse the responses
and decisions that may be required in an actual stress. The results and
lessons learnt from the fire drills are used to enhance NatWest
Group’s approach to recovery planning.
Under the resolution assessment part of the PRA rulebook, NatWest
Group is required to carry out an assessment of its preparations for
resolution, submit a report of the assessment to the PRA and publish a
summary of this report.
Resolution would be implemented if NatWest Group was assessed by
the UK authorities to have failed and the appropriate regulator put it
into resolution. The process of resolution is owned and implemented
by the Bank of England (as the UK resolution authority). A multi-year
programme is in place to further develop resolution capability in line
with regulatory requirements.
Stress testing – climate
NatWest Group will be carrying out climate scenario and stress-testing
analysis as part of the Bank of England’s 2021 biennial exploratory
scenario. The exercise will explore three distinct climate scenarios
over a 30 year horizon to test the financial system’s resilience to
climate-related risks.
NatWest Group is also participating in the United Nations Environment
Programme Finance Initiative focusing on analysis of how physical and
transition risks could affect the agriculture and real estate sectors.
Stress testing – market risk
Non-traded market risk
Non-traded exposures are reported to the PRA on a quarterly basis.
This provides the regulator with an overview of NatWest Group’s
banking book interest rate exposure. The report includes detailed
product information analysed by interest rate driver and other
characteristics, including accounting classification, currency and
counterparty type.
Non-traded exposures are capitalised through the ICAAP. This covers
gap risk, basis risk, credit spread risk, pipeline risk, structural foreign
exchange risk, prepayment risk, equity risk and accounting volatility
risk. The ICAAP is completed with a combination of value and
earnings measures. The total non-traded market risk capital
requirement is determined by adding the different charges for each
sub risk type. The ICAAP methodology captures at least ten years of
historical volatility, produced with a 99% confidence level.
Methodologies are reviewed by NatWest Group Model Risk and the
results are approved by the NatWest Group Technical Asset & Liability
Management Committee.
Non-traded market risk stress results are combined with those for
other risks into the capital plan presented to the Board. The cross-risk
capital planning process is conducted once a year, with a planning
horizon of five years. The scenario narratives cover both regulatory
scenarios and macroeconomic scenarios identified by NatWest Group.
Vulnerability-based stress testing begins with the analysis of a portfolio
and expresses its key vulnerabilities in terms of plausible, vulnerability
scenarios under which the portfolio would suffer material losses.
These scenarios can be historical, macroeconomic or forward-
looking/hypothetical. Vulnerability-based stress testing is used for
internal management information and is not subject to limits. The
results for relevant scenarios are reported to senior management.
Traded market risk
NatWest Group carries out daily market risk stress testing to identify
vulnerabilities and potential losses in excess of, or not captured in,
value-at-risk. The calculated stresses measure the impact of changes
in risk factors on the fair values of the trading and fair value through
other comprehensive income portfolios.
NatWest Group conducts historical, macroeconomic and vulnerability-
based stress testing. Historical stress testing is a measure that is used
for internal management. Using the historical simulation framework
employed for value-at-risk, the current portfolio is stressed using
historical data since 1 January 2005. This methodology simulates the
impact of the 99.9 percentile loss that would be incurred by historical
risk factor movements over the period, assuming variable holding
periods specific to the risk factors and the businesses.
Historical stress tests form part of the market risk limit framework and
their results are reported daily to senior management. Macroeconomic
stress tests are carried out periodically as part of the bank-wide, cross-
risk capital planning process. The scenario narratives are translated
into risk factor shocks using historical events and insights by
economists, risk managers and the first line.
Market risk stress results are combined with those for other risks into
the capital plan presented to the Board. The cross-risk capital planning
process is conducted once a year, with a planning horizon of five
years. The scenario narratives cover both regulatory scenarios and
macroeconomic scenarios identified by NatWest Group.
Vulnerability-based stress testing begins with the analysis of a portfolio
and expresses its key vulnerabilities in terms of plausible, vulnerability
scenarios under which the portfolio would suffer material losses.
These scenarios can be historical, macroeconomic or forward-
looking/hypothetical. Vulnerability-based stress testing is used for
internal management information and is not subject to limits. The
results for relevant scenarios are reported to senior management.
NatWest Group Annual Report and Accounts 2020
163
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Risk management framework continued
Internal scenarios
During 2020, NatWest Group continuously refined and reviewed a
series of internal scenarios – benchmarked against the Bank of
England’s illustrative scenario – as the impact of COVID-19 evolved,
including actual and potential effects on economic fundamentals.
These scenarios included:
The impact of travel restrictions, social distancing policies, self-
isolation and sickness on GDP, employment and consumer
spending.
The impacts on business investment in critical sectors.
The effect on house prices, commercial real estate values and
major project finance.
The effect of government interventions such as the Job Retention
Scheme and the Coronavirus Business Interruption Loan Scheme.
Applying the macro-scenarios to NatWest Group’s earnings, capital,
liquidity and funding positions did not result in a breach of any
regulatory thresholds.
Regulatory stress testing
NatWest Group has participated in the regulatory stress tests
conducted annually by the Bank of England and biennially by the
European Banking Authority (EBA). The results of these regulatory
stress tests are carefully assessed and form part of the wider risk
management of NatWest Group. However, in 2020 due to the impacts
of COVID-19, the Bank of England and the EBA suspended their
stress tests. Following the UK’s exit from the European Union on 31
December 2020, only relevant European subsidiaries of NatWest
Group will take part in the EBA tests going forward. NatWest Group
itself will not participate.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
164
Risk and capital management
Credit risk
Definition
Credit risk is the risk that customers and counterparties fail to meet
their contractual obligation to settle outstanding amounts.
Sources of risk
The principal sources of credit risk for NatWest Group are lending, off-
balance sheet products, derivatives and securities financing, and debt
securities. NatWest Group is also exposed to settlement risk through
foreign exchange, trade finance and payments activities.
Key developments in 2020
The outlook for credit risk and asset quality deteriorated during the
year driven by the unprecedented economic impact and disruption
from COVID-19.
The severity of the disruption impacted both Personal and
Wholesale customers.
The overall expected credit loss (ECL) charge increased materially
as a result during 2020, largely during the second quarter of the
year. The ECL charge was driven by Stage 2 where, due to the
forward-looking nature of the IFRS 9 ECL model, there was a large
migration of exposure into this category. Stage 3 ECL charges
remained supressed as a result of government support schemes
mitigating against defaults at this stage.
NatWest Group participated in government backed support
mechanisms, including granting payment holidays (also referred to
as payment deferrals), originating loans and offering concessions
where appropriate. As the various support schemes conclude,
NatWest Group anticipates further credit deterioration in portfolios.
Further details on the impact of COVID-19 on credit risk in NatWest
Group are disclosed in the impact of COVID-19 section.
Governance
The Credit Risk function provides oversight of frontline credit risk
management activities.
Governance activities include:
Defining credit risk appetite for the management of concentration
risk and credit policy to establish the key causes of risk in the
process of providing credit and the controls that must be in place to
mitigate them.
Approving and monitoring credit limits.
Oversight of the first line of defence to ensure that credit risk
remains within the appetite set by the Board and that controls are
being operated adequately and effectively.
Assessing the adequacy of ECL provisions including approving any
necessary in-model and post model adjustments through NatWest
Group and business unit provisions and model committees.
Risk appetite
Credit risk appetite aligns to the strategic risk appetite set by the Board
and is set and monitored through risk appetite frameworks tailored to
NatWest Group’s Personal and Wholesale segments.
Personal
The Personal credit risk appetite framework sets limits that measure
and control the quality and concentration of both existing and new
business for each relevant business segment. The actual performance
of each portfolio is tracked relative to these limits and management
action is taken where necessary. The limits apply to a range of credit
risk-related measures including expected loss at both portfolio and
product level, projected credit default rates across products and the
loan-to-value (LTV) ratio of the mortgage portfolios.
Wholesale
For Wholesale credit, the framework has been designed to reflect
factors that influence the ability to operate within risk appetite. Tools
such as stress testing and economic capital are used to measure
credit risk volatility and develop links between the framework and risk
appetite limits.
Four formal frameworks are used, classifying, measuring and
monitoring credit risk exposure across single name, sector and country
concentrations and product and asset classes with heightened risk
characteristics.
The framework is supported by a suite of transactional acceptance
standards that set out the risk parameters within which businesses
should operate.
Credit policy standards are in place for both the Wholesale and
Personal portfolios. They are expressed as a set of mandatory
controls.
Identification and measurement
Credit stewardship
Risks are identified through relationship management and credit
stewardship of customers and portfolios. Credit risk stewardship takes
place throughout the customer relationship, beginning with the initial
approval. It includes the application of credit assessment standards,
credit risk mitigation and collateral, ensuring that credit documentation
is complete and appropriate, carrying out regular portfolio or customer
reviews and problem debt identification and management. Additional
stewardship measures were put in place in response to COVID-19.
Refer to the Impact of COVID-19 section for further details.
Asset quality
All credit grades map to an asset quality (AQ) scale, used for financial
reporting. Performing loans are defined as AQ1-AQ9 (where the
probability of default (PD) is less than 100%) and defaulted non-
performing loans as AQ10 or Stage 3 under IFRS 9 (where the PD is
100%). Loans are defined as defaulted when the payment status
becomes 90 days past due, or earlier if there is clear evidence that the
borrower is unlikely to repay, for example bankruptcy or insolvency.
Counterparty credit risk
Counterparty credit risk arises from the obligations of customers under
derivative and securities financing transactions.
NatWest Group mitigates counterparty credit risk through
collateralisation and netting agreements, which allow amounts owed
by NatWest Group to a counterparty to be netted against amounts the
counterparty owes NatWest Group.
Mitigation
Mitigation techniques, as set out in the appropriate credit policies and
transactional acceptance standards, are used in the management of
credit portfolios across NatWest Group. These techniques mitigate
credit concentrations in relation to an individual customer, a borrower
group or a collection of related borrowers. Where possible, customer
credit balances are netted against obligations. Mitigation tools can
include structuring a security interest in a physical or financial asset,
the use of credit derivatives including credit default swaps, credit-
linked debt instruments and securitisation structures, and the use of
guarantees and similar instruments (for example, credit insurance)
from related and third parties. Property is used to mitigate credit risk
across a number of portfolios, in particular residential mortgage
lending and commercial real estate (CRE).
The valuation methodologies for collateral in the form of residential
mortgage property and CRE are detailed below.
NatWest Group Annual Report and Accounts 2020
165
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Residential mortgages – NatWest Group takes collateral in the form of
residential property to mitigate the credit risk arising from mortgages.
NatWest Group values residential property during the loan
underwriting process by either appraising properties individually or
valuing them collectively using statistically valid models. NatWest
Group updates residential property values quarterly using the relevant
residential property index namely:
Region
UK (including
Northern Ireland)
Republic of Ireland
Index used
Office for National Statistics House
Price Index
Central Statistics Office Residential
Property Price Index
The current indexed value of the property is a component of the ECL
provisioning calculation.
Commercial real estate valuations – NatWest Group has a panel of
chartered surveying firms that cover the spectrum of geography and
property sectors in which NatWest Group takes collateral. Suitable
valuers for particular assets are contracted through a single service
agreement to ensure consistency of quality and advice. Valuations are
generally commissioned when an asset is taken as security; a material
increase in a facility is requested; or a default event is anticipated or
has occurred. In the UK, an independent third-party market indexation
is applied to update external valuations once they are more than a
year old and every three years a formal independent valuation is
commissioned. In the Republic of Ireland, assets are revalued in line
with the Central Bank of Ireland threshold requirements, which permits
indexation for lower value residential assets, but demands regular Red
Book valuations for higher value assets.
Assessment and monitoring
Practices for credit stewardship – including credit assessment,
approval and monitoring as well as the identification and management
of problem debts – differ between the Personal and Wholesale
portfolios.
Personal
Personal customers are served through a lending approach that
entails offering a large number of small-value loans. To ensure that
these lending decisions are made consistently, NatWest Group
analyses internal credit information as well as external data supplied
by credit reference agencies (including historical debt servicing
behaviour of customers with respect to both NatWest Group and other
lenders). NatWest Group then sets its lending rules accordingly,
developing different rules for different products.
The process is then largely automated, with each customer receiving
an individual credit score that reflects both internal and external
behaviours and this score is compared with the lending rules set. For
relatively high-value, complex personal loans, including some
residential mortgage lending, specialist credit managers make the final
lending decisions. These decisions are made within specified
delegated authority limits that are issued dependent on the experience
of the individual.
Underwriting standards and portfolio performance are monitored on an
ongoing basis to ensure they remain adequate in the current market
environment and are not weakened materially to sustain growth.
Wholesale
Wholesale customers – including corporates, banks and other financial
institutions – are grouped by industry sectors and geography as well
as by product/asset class and are managed on an individual basis.
Customers are aggregated as a single risk when sufficiently
interconnected.
A credit assessment is carried out before credit facilities are made
available to customers. The assessment process is dependent on the
complexity of the transaction. Credit approvals are subject to
environmental, social and governance risk policies which restrict
exposure to certain highly carbon intensive industries as well as those
with potentially heightened reputational impacts.
For lower risk transactions below specific thresholds, credit decisions
can be approved through self-sanctioning within the business. This
process is facilitated through an auto-decision making system, which
utilises scorecards, strategies and policy rules. Such credit decisions
must be within the approval authority of the relevant business
sanctioner.
For all other transactions, credit is only granted to customers following
joint approval by an approver from the business and the credit risk
function or by two credit officers. The joint business and credit
approvers act within a delegated approval authority under the
Wholesale Credit Authorities Framework Policy. The level of delegated
authority held by approvers is dependent on their experience and
expertise with only a small number of senior executives holding the
highest approval authority. Both business and credit approvers are
accountable for the quality of each decision taken, although the credit
risk approver holds ultimate sanctioning authority.
Transactional acceptance standards provide detailed transactional
lending and risk acceptance metrics and structuring guidance. As
such, these standards provide a mechanism to manage risk appetite at
the customer/transaction level and are supplementary to the
established credit risk appetite.
Credit grades (PD) and loss given default (LGD) are reviewed and if
appropriate re-approved annually. The review process assesses
borrower performance, including reconfirmation or adjustment of risk
parameter estimates; the adequacy of security; compliance with terms
and conditions; and refinancing risk.
Problem debt management
Personal
Early problem identification
Pre-emptive triggers are in place to help identify customers that may
be at risk of being in financial difficulty. These triggers are both
internal, using NatWest Group data, and external using information
from credit reference agencies. Proactive contact is then made with
the customer to establish if they require help with managing their
finances. By adopting this approach, the aim is to prevent a customer’s
financial position deteriorating which may then require intervention
from the Collections and Recoveries teams.
Personal customers experiencing financial difficulty are managed by
the Collections team. If the Collections team is unable to provide
appropriate support after discussing suitable options with the
customer, management of that customer moves to the Recoveries
team. If at any point in the collections and recoveries process, the
customer is identified as being potentially vulnerable, the customer will
be separated from the regular process and supported by a specialist
team to ensure the customer receives appropriate support for their
circumstances.
Collections
When a customer exceeds an agreed limit or misses a regular monthly
payment the customer is contacted by NatWest Group and requested
to remedy the position. If the situation is not regularised then, where
appropriate, the Collections team will become more fully involved and
the customer will be supported by skilled debt management staff who
endeavour to provide customers with bespoke solutions. Solutions
include short-term account restructuring, refinance loans and
forbearance which can include interest suspension and ‘breathing
space’. In the event that an affordable/sustainable agreement with a
customer cannot be reached, the debt will transition to the Recoveries
team. For provisioning purposes, under IFRS 9, exposure to
customers managed by the Collections team is categorised as Stage 2
and subject to a lifetime loss assessment, unless it is 90 days past due
or has an interest non-accrual status, in which case it is categorised as
Stage 3.
In the Republic of Ireland, the relationship may pass to a specialist
support team prior to any transfer to recoveries, depending on the
outcome of customer financial assessment.
NatWest Group Annual Report and Accounts 2020
166
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Recoveries
The Recoveries team will issue a notice of intention to default to the
customer and, if appropriate, a formal demand, while also registering
the account with credit reference agencies where appropriate.
Following this, the customer’s debt may then be placed with a third-
party debt collection agency, or alternatively a solicitor, in order to
agree an affordable repayment plan with the customer. An option that
may also be considered, is the sale of unsecured debt. Exposures
subject to formal debt recovery are defaulted and categorised as
Stage 3 impaired.
Wholesale
Early problem identification
Each segment and sector have defined early warning indicators to
identify customers experiencing financial difficulty, and to increase
monitoring if needed. Early warning indicators may be internal, such as
a customer’s bank account activity, or external, such as a publicly-
listed customer’s share price. If early warning indicators show a
customer is experiencing potential or actual difficulty, or if relationship
managers or credit officers identify other signs of financial difficulty,
they may decide to classify the customer within the Risk of Credit Loss
framework.
Risk of Credit Loss framework
The framework focuses on Wholesale customers whose credit profiles
have deteriorated materially since origination. Expert judgement is
applied by experienced credit risk officers to classify cases into
categories that reflect progressively deteriorating credit risk to NatWest
Group. There are two classifications which apply to non-defaulted
customers within the framework – Heightened Monitoring and Risk of
Credit Loss. For the purposes of provisioning, all exposures subject to
the framework are categorised as Stage 2 and subject to a lifetime
loss assessment. The framework also applies to those customers that
have met NatWest Group’s default criteria (AQ10 exposures).
Defaulted exposures are categorised as Stage 3 impaired for
provisioning purposes.
Heightened Monitoring customers are performing customers that have
met certain characteristics, which have led to significant credit
deterioration. Collectively, characteristics reflect circumstances that
may affect the customer’s ability to meet repayment obligations.
Characteristics include trading issues, covenant breaches, material PD
downgrades and past due facilities.
Heightened Monitoring customers require pre-emptive actions (outside
the customer’s normal trading patterns) to return or maintain their
facilities within NatWest Group’s current risk appetite prior to maturity.
Risk of Credit Loss customers are performing customers that have met
the criteria for Heightened Monitoring and also pose a risk of credit
loss to NatWest Group in the next 12 months should mitigating action
not be taken or not be successful.
Once classified as either Heightened Monitoring or Risk of Credit
Loss, a number of mandatory actions are taken in accordance with
policies. Actions include a review of the customer’s credit grade,
facility and security documentation and the valuation of security.
Depending on the severity of the financial difficulty and the size of the
exposure, the customer relationship strategy is reassessed by credit
officers, by specialist credit risk or relationship management units in
the relevant business, or by Restructuring.
Agreed customer management strategies are regularly monitored by
both the business and credit teams. The largest Risk of Credit Loss
exposures are regularly reviewed by a Risk of Credit Loss Committee.
The committee members are experienced credit, business and
restructuring specialists. The purpose of the committee is to review
and challenge the strategies undertaken for customers that pose the
largest risk of credit loss to NatWest Group.
Appropriate corrective action is taken when circumstances emerge
that may affect the customer’s ability to service its debt (refer to
Heightened Monitoring characteristics). Corrective actions may include
granting a customer various types of concessions. Any decision to
approve a concession will be a function of specific appetite, the credit
quality of the customer, the market environment and the loan structure
and security. All customers granted forbearance are classified
Heightened Monitoring as a minimum.
Other potential outcomes of the relationship review are to: remove the
customer from the Risk of Credit Loss framework, offer additional
lending and continue monitoring, transfer the relationship to
Restructuring if appropriate, or exit the relationship.
The Risk of Credit Loss framework does not apply to problem debt
management for business banking customers. These customers are,
where necessary, managed by specialist problem debt management
teams, depending on the size of exposure or by the business banking
recoveries team where a loan has been impaired.
Restructuring
Where customers are categorised as Risk of Credit Loss, relationships
are mainly managed by the Restructuring team. The purpose of
Restructuring is to protect NatWest Group’s capital. Restructuring
does this by working with corporate and commercial customers in
financial difficulty on their restructuring and repayment strategies.
Restructuring will always aim to recover capital fairly and efficiently.
Specialists in Restructuring work with customers experiencing financial
difficulties and showing signs of financial stress. Throughout
Restructuring’s involvement, the mainstream relationship manager will
remain an integral part of the customer relationship, unless a
repayment strategy is deemed appropriate. The objective is to find a
mutually acceptable solution, including restructuring of existing
facilities, repayment or refinancing.
Where a solvent outcome is not possible, insolvency may be
considered as a last resort. However, helping the customer return to
financial health and restoring a normal banking relationship is always
the preferred outcome.
Forbearance
Forbearance takes place when a concession is made on the
contractual terms of a loan/debt in response to a customer’s financial
difficulties.
The aim of forbearance is to support and restore the customer to
financial health while minimising risk. To ensure that forbearance is
appropriate for the needs of the customer, minimum standards are
applied when assessing, recording, monitoring and reporting
forbearance.
A credit exposure may be forborne more than once, generally where a
temporary concession has been granted and circumstances warrant
another temporary or permanent revision of the loan’s terms.
In the Personal portfolio, loans are reported as forborne until they meet
the exit criteria set out by the European Banking Authority. These
include being classified as performing for two years since the last
forbearance event, making regular repayments and the loan/debt
being less than 30 days past due. Exit criteria are not currently applied
for Wholesale portfolios.
Types of forbearance
Personal
In the Personal portfolio, forbearance may involve payment
concessions and loan rescheduling (including extensions in
contractual maturity), capitalisation of arrears and, in the Republic of
Ireland only, temporary interest-only or partial capital and interest
arrangements. Forbearance support is provided for both mortgages
and unsecured lending.
NatWest Group Annual Report and Accounts 2020
167
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Wholesale
In the Wholesale portfolio, forbearance may involve covenant waivers,
amendments to margins, payment concessions and loan rescheduling
(including extensions in contractual maturity), capitalisation of arrears,
and debt forgiveness or debt-for-equity swaps.
Monitoring of forbearance
Personal
For Personal portfolios, forborne loans are separated and regularly
monitored and reported while the forbearance strategy is implemented,
until they exit forbearance.
Wholesale
In the Wholesale portfolio, customer PDs and facility LGDs are
reassessed prior to finalising any forbearance arrangement. The
ultimate outcome of a forbearance strategy is highly dependent on the
co-operation of the borrower and a viable business or repayment
outcome. Where forbearance is no longer appropriate, NatWest Group
will consider other options such as the enforcement of security,
insolvency proceedings or both, although these are options of last
resort.
Provisioning requirements on forbearance are detailed in the
Provisioning for forbearance section.
Impact of COVID-19
COVID-19 has necessitated various changes to the “business as
usual” credit risk management approaches set out above. Specific
adjustments made to credit risk management as a result of COVID-19
are set out below.
Risk appetite
Personal
The onset of COVID-19 resulted in a significant deterioration in the
economic outlook and consequently the credit environment. In
response, credit risk appetite was tightened including changes to credit
score acceptance thresholds and certain credit policy criteria, for
example, maximum loan-to-values on new mortgage business. The
criteria were reviewed and adapted on an ongoing basis throughout
the year.
Wholesale
At the outset of COVID-19, Wholesale Credit Risk undertook a
vulnerability assessment of sectors and conducted more frequent
monitoring of these portfolios, including sub-sector and single name
analysis. Additional oversight forums for both new and existing
customer requests linked to sector, customer viability and transaction
value were also introduced. Monitoring of government support scheme
lending, including tracking customer lending journeys to prioritise
resources, ensured customers could be supported in a timely manner.
Risk appetite limits were reduced to reflect current risks and remain
under constant review.
Identification and measurement
Credit stewardship
Wholesale
Natwest Group’s credit stewardship included carrying out regular
portfolio or customer reviews and problem debt identification and
management.
In line with existing credit policy parameters, relationship managers
were able to defer annual reviews for a maximum of three months.
These deferrals were used during 2020 to provide capacity to focus on
supporting government lending scheme requests. Customer review
meetings took place virtually unless a specific customer request was
made, prior approval obtained and a risk assessment carried out.
Mitigation
Personal
During the COVID-19 lockdown from April to June in the UK, valuers
were prohibited from conducting physical property inspections. As a
result, mortgage application processing was suspended where a
physical valuation was required. Applications eligible for remote
valuations (known as desktops) and automated valuations (AVM) were
able to continue and NatWest Group increased its valuation capacity
to provide an additional quality assurance benchmark for ongoing
assessment of desktop and AVM standards. Following the April to
June lockdown, the application backlog was cleared once valuers were
able to safely return to physical property inspections.
Commercial real estate valuations
Commercial property valuations were not conducted during the initial
national lockdown due to travel restrictions, during which time physical
valuations were postponed. Following this period, government
guidance across the UK nations in respect of local and national
lockdowns, confirmed that full internal property inspections could
continue subject to adopting COVID-19 secure protocols. However,
this required the full co-operation of occupiers and in addition, some
commercial premises remained closed. Due to the limitations of some
property valuations, The Royal Institute for Chartered Surveyors
introduced a Material Valuation Uncertainty Clause (MVUC) for use at
the time. There was a general lifting of the MVUC for all UK real estate
valuations in September. However, where there is still considerable
uncertainty for a location or particular sub-sector (for example, assets
valued with reference to their trading potential such as hotels), the
MVUC may still apply. This position has not changed with second
wave local or subsequent national lockdowns.
Assessment and monitoring
Personal
Reflecting the deteriorated economic outlook, underwriting standards
were tightened including additional information requirements from self-
employed applicants.
Customers requesting a COVID-19 related payment holiday were not
subject to a credit assessment for those requests.
Portfolio performance monitoring was expanded to include insight on
customers accessing payment holiday support and their performance
at the end of the payment holiday period.
Wholesale
NatWest Group established guidance on credit grading in response to
COVID-19 to ensure consistent and fair outcomes for customers,
whilst appropriately reflecting the economic outlook.
Within the Wholesale portfolio, customer credit grades were
reassessed when a request for financing was made, a scheduled
customer credit review undertaken or a material event specific to
that customer occurred.
A request for support using one of the government-backed
COVID-19 support schemes was not, in itself, a reason for a
customer’s credit grade to be amended.
Large or complex customers were graded using financial
forecasts, incorporating both the effect of COVID-19 and the
estimated length of time to return to within credit appetite metrics.
All other customers who were not subject to any wider significant
increase in credit risk (SICR) triggers and who were assessed as
having the ability in the medium-term post-COVID-19 to be viable
and meet credit appetite metrics were graded using audited
accounts.
NatWest Group identified those customers for whom additional
borrowing would require remedial action to return to within risk
appetite over the medium term, and customers who were
exhibiting signs of financial stress before COVID-19. These
customers were graded with reference to the impact COVID-19
had on their business.
Tailored guidance applies to financial institutions and, where
appropriate, specialist credit grading models such as CRE.
For certain types of COVID-19 related lending under government
support schemes, notably BBLs, in line with the requirements of
those schemes, a credit assessment was not undertaken.
NatWest Group Annual Report and Accounts 2020
168
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Within the Wholesale portfolio, additional monitoring was implemented
to identify and monitor specific sectors which had been particularly
adversely affected by COVID-19 and the use of government support
schemes (refer to Wholesale support schemes for further details).
Problem debt management
Personal
In accordance with regulatory guidance, Personal customers were
able to obtain a payment holiday of up to three months, twice, if
requested. Such payment holidays would not necessarily have been
considered forbearance (refer to Forbearance below).
In addition, NatWest Group suspended new formal repossession
recovery action for Personal customers.
Wholesale
In response to COVID-19, a new framework was introduced to
categorise clients in a consistent manner across the Wholesale
portfolio, based on the impact of COVID-19 on their financial position
and outlook in relation to the sector risk appetite. This framework was
extended to all Wholesale customers and supplemented the Risk of
Credit Loss framework in assessing whether customers exhibited a
SICR, and if support was considered to be granting forbearance.
Tailored approaches were also introduced for business banking,
commercial real estate and financial institutions customers.
Forbearance
Personal
In the absence of any other forbearance or SICR triggers, customers
granted COVID-19 related payment holidays were not considered
forborne and were not subject to Collections team engagement.
However, a subset of customers who had accessed payment holiday
support, and where their risk profile was identified as relatively high
risk, were collectively migrated to Stage 2. Any support provided
beyond the completion of a second payment holiday is considered
forbearance, provided the customer’s circumstances met the
definitions for forbearance as described above.
Wholesale
Customers seeking COVID-19 related support, including payment
holidays, who were not subject to any wider SICR triggers and who
were assessed as having the ability in the medium term post-COVID-
19 to be viable and meet credit appetite metrics, were not considered
to have been granted forbearance.
ECL modelling
The unprecedented nature of COVID-19 required various interventions
in ECL modelling to ensure reasonable and supportable ECL
estimates. These are detailed in the Model monitoring and
enhancement section.
Credit grading models
Credit grading models is the collective term used to describe all
models, frameworks and methodologies used to calculate PD,
exposure at default (EAD), LGD, maturity and the production of credit
grades.
Credit grading models are designed to provide:
An assessment of customer and transaction characteristics.
A meaningful differentiation of credit risk.
Accurate internal default, loss and EAD estimates that are used in
the capital calculation or wider risk management purposes.
Impairment, provisioning and write-offs
In the overall assessment of credit risk, impairment provisioning and
write-offs are used as key indicators of credit quality.
Five key areas may materially influence the measurement of credit
impairment under IFRS 9 – two of these relate to model build and
three relate to model application:
Model build:
o
o
The determination of economic indicators that have most
influence on credit loss for each portfolio and the severity of
impact (this leverages existing stress testing models which
are reviewed annually).
The build of term structures to extend the determination of
the risk of loss beyond 12 months that will influence the
impact of lifetime loss for assets in Stage 2.
Model application:
o
o
o
The assessment of the SICR and the formation of a
framework capable of consistent application.
The determination of asset lifetimes that reflect behavioural
characteristics while also representing management actions
and processes (using historical data and experience).
The choice of forward-looking economic scenarios and their
respective probability weights.
Refer to Accounting policy 13 for further details.
IFRS 9 ECL model design principles
Modelling of ECL for IFRS 9 follows the conventional approach to
divide the problem of estimating credit losses for a given account into
its component parts of PD, LGD and EAD.
To meet IFRS 9 requirements, the PD, LGD and EAD parameters
differ from their Pillar 1 internal ratings based counterparts in the
following aspects:
Unbiased – material regulatory conservatism has been removed
from IFRS 9 parameters to produce unbiased estimates.
Point-in-time – IFRS 9 parameters reflect actual economic
conditions at the reporting date instead of long-run average or
downturn conditions.
Forward-looking – IFRS 9 PD estimates and, where appropriate,
EAD and LGD estimates reflect forward-looking economic
conditions.
Tenor – IFRS 9 PD, LGD and EAD are provided as multi-period
term structures up to exposure lifetimes instead of a fixed one-year
horizon.
IFRS 9 requires that at each reporting date, an entity shall assess
whether the credit risk on an account has increased significantly since
initial recognition. Part of this assessment requires a comparison to be
made between the current lifetime PD (i.e. the PD over the remaining
lifetime at the reporting date) with the equivalent lifetime PD as
determined at the date of initial recognition.
For assets originated before IFRS 9 was introduced, comparable
lifetime origination PDs did not exist. These have been retrospectively
created using the relevant model inputs applicable at initial recognition.
PD estimates
Personal models
Personal PD models use the Exogenous, Maturity and Vintage (EMV)
approach to model default rates. The EMV approach separates
portfolio default risk trends into three components: vintage effects
(quality of new business over time), maturity effects (changes in risk
relating to time on book) and exogenous effects (changes in risk
relating to changes in macro-economic conditions). The EMV
methodology has been widely adopted across the industry because it
enables forward-looking economic information to be systematically
incorporated into PD estimates. However, the unprecedented nature of
COVID-19 required certain modelling interventions that are detailed in
the UK economic uncertainty section.
NatWest Group’s IFRS 9 provisioning models, which used existing
Basel models as a starting point, incorporate term structures and
forward-looking information. Regulatory conservatism within the Basel
models has been removed as appropriate to comply with the IFRS 9
requirement for unbiased ECL estimates.
NatWest Group Annual Report and Accounts 2020
169
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Wholesale models
Wholesale PD models use a point-in-time/through-the-cycle framework
to convert one-year regulatory PDs into point-in-time estimates that
accurately reflect economic conditions observed at the reporting date.
The framework utilises credit cycle indices (CCIs) across a
comprehensive set of region/industry segments. Further detail on CCIs
is provided in the Economic loss drivers section.
One year point-in-time PDs are subsequently extended to forward-
looking lifetime PDs using a conditional transition matrix approach and
a set of econometric models.
LGD estimates
The general approach for the IFRS 9 LGD models is to leverage
corresponding Basel LGD models with bespoke adjustments to ensure
estimates are unbiased and where relevant, forward-looking.
Personal
Forward-looking information has only been incorporated for the
secured portfolios, where changes in property prices can be readily
accommodated. Analysis has shown minimal impact of economic
conditions on LGDs for the other Personal portfolios. For Ulster Bank
RoI, a bespoke IFRS 9 mortgage LGD model is used, reflecting its
specific regional market.
Wholesale
Forward-looking economic information is incorporated into LGD
estimates using the existing CCI framework. For low default portfolios,
including sovereigns and banks, loss data is too scarce to substantiate
estimates that vary with economic conditions. Consequently, for these
portfolios, LGD estimates are assumed to be constant throughout the
projection horizon.
EAD estimates
Personal
The IFRS 9 Personal modelling approach for EAD is dependent on
product type.
Revolving products use the existing Basel models as a basis, with
appropriate adjustments incorporating a term structure based on
time to default.
Amortising products use an amortising schedule, where a formula
is used to calculate the expected balance based on remaining
terms and interest rates.
There is no EAD model for Personal loans. Instead, debt flow (i.e.
combined PD x EAD) is modelled directly.
Analysis has indicated that there is minimal impact on EAD arising
from changes in the economy for all Personal portfolios except
mortgages. Therefore, forward-looking information is only incorporated
in the mortgage EAD model (through forecast changes in interest
rates).
Wholesale
For Wholesale, EAD values are projected using product specific credit
conversion factors (CCFs), closely following the product segmentation
and approach of the respective Basel model. However, the CCFs are
estimated over multi-year time horizons to produce unbiased model
estimates.
No explicit forward-looking information is incorporated, on the basis
that analysis has shown that temporal variations in CCFs are mainly
attributable to changes in exposure management practices rather than
economic conditions.
Governance and post model adjustments
The IFRS 9 PD, EAD and LGD models are subject to NatWest Group’s model risk policy that stipulates periodic model monitoring, periodic re-
validation and defines approval procedures and authorities according to model materiality. Various post model adjustments (PMAs) were
applied where management judged they were necessary to ensure an adequate level of overall ECL provision. All PMAs were subject to formal
approval through provisioning governance, and were categorised as follows (business level commentary is provided below):
Deferred model calibrations – ECL adjustments where PD model monitoring indicated that losses were being over predicted but where it
was judged that an implied ECL release was not supportable. As a consequence, any potential ECL release was deferred and retained on
the balance sheet.
Economic uncertainty – ECL adjustments primarily arising from uncertainties associated with multiple economic scenarios (also for 2019)
and credit outcomes as a result of the effect of COVID-19 and the consequences of government interventions. In both cases, management
judged that additional ECL was required until further credit performance data became available on the behavioural and loss consequences
of COVID-19.
Other adjustments – ECL adjustments where it was judged that the modelled ECL required to be amended.
ECL post model adjustments
2020
Deferred model calibrations
Economic uncertainty
Other adjustments
Total
2019
Deferred model calibrations
Economic uncertainty
Other adjustments
Total
Retail
Banking
Ulster
Commercial
Bank RoI
Banking
Other
£m
34
158
20
212
—
83
45
128
£m
2
176
26
204
1
14
25
40
£m
13
526
19
558
—
98
5
103
£m
—
18
3
21
—
7
4
11
Total
£m
49
878
68
995
1
202
79
282
Note:
(1) For 2019, the PMA for model calibrations of approximately £22 million was reported on a different basis. At that time, the value was based on the required ECL
uplift pending systematic updates to model parameters, although the adjustment value was included in the reported ECL. For 2020, the value of PD calibration
releases that were deemed not supportable and retained on the balance sheet is disclosed. Therefore, to be consistent in approach, the PMA value for 2019
has been reported as nil. For LGD, where model monitoring outcomes were less clear, and emerged over an extended period, monitoring focused on assessing
the adequacy of loss estimates, and was duly assured and governed at the year end.
NatWest Group Annual Report and Accounts 2020
170
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Retail Banking – The PMA for deferred model calibrations of £34
million (of which £25 million was in mortgages) reflected
management’s judgement that the beneficial modelling impact, and
implied ECL decrease, arising from underlying portfolio performance,
that had been influenced by the various customer support
mechanisms, was not supportable.
The PMA for economic uncertainty included an ECL uplift of £63
million (of which £39 million was in mortgages) on a subset of
customers who had accessed payment holiday support where their
risk profile was identified as relatively high risk. In addition, there was a
holdback of a modelled ECL release of £69 million, again due to the
delayed default emergence reflective of the various customer support
mechanisms (£15 million related to mortgages and £54 million related
to unsecured lending). The overlay as at 31 December 2019 was
reflective of the uncertainty associated with Brexit, subsequently
systematically incorporated within the multiple economic scenarios.
The 2020 overlay also included an ECL uplift on buy-to-let mortgages
of £15 million (2019 – £8 million) to mitigate the risk of a
disproportionate credit deterioration in challenging economic
circumstances.
Other judgmental overlays included £13 million (2019 – £15 million) in
respect of the repayment risk not captured in the models, that a
proportion of customers on interest-only mortgages would not be able
to repay the capital element of their loan at the end of term, as well as
a £7 million overlay for an identified weakness in the mortgage PD
model pending remediation.
Ulster Bank RoI – The PMA for economic uncertainty included an
adjustment of £103 million in the mortgage portfolio reflecting concerns
that expected losses arising from defaults in the year ahead would be
significantly higher than modelled. Like Commercial Banking (further
detail below), there was an overlay of £30 million in the Wholesale
portfolio relative to concerns about debt recovery values and the risk of
idiosyncratic credit outcomes. It also included adjustments of £10
million in respect of high risk payment break mortgage customers and
£31 million in the SME portfolio reflective of the elevated risk for this
sector. These two overlays were also associated with a collective
migration of exposures to Stage 2. Refer to the Stage 2 decomposition
analysis for further details.
Other judgemental overlays included a Stage 3 ECL uplift of £25
million in the mortgage portfolio to address concerns that the loss
outcome under the forecast macro-economic scenarios would be
higher than modelled. Similar to Retail Banking and Commercial
Banking, there was also a PMA for deferred model calibrations of £2
million in the retail unsecured and business banking portfolios.
Commercial Banking – The PMA for economic uncertainty included an
overlay of £409 million (£450 million across NatWest Group’s
Wholesale portfolio) based on a judgemental thesis, reflecting concern
that the unprecedented nature of COVID-19 could result in longer debt
recovery periods and lower values than history suggested, and also
the risk of idiosyncratic credit outcomes. It also included an overlay of
£52 million in respect of elevated concerns around borrowers’ ability to
refinance facilities at the end of the contractual term. Additionally, it
included overlays to address the effects of customer support
mechanisms. Similar to Retail Banking, the overlay as at 31 December
2019 was reflective of the uncertainty associated with Brexit,
subsequently systematically incorporated within the multiple economic
scenarios.
There was also a PMA for deferred model calibrations on the business
banking portfolio reflecting management’s judgement that the
beneficial modelling impact, and implied ECL decrease, was not
supportable again whilst portfolio performance was being under-
pinned by the various support mechanisms. Other adjustments
included an overlay of £19 million to mitigate the effect of operational
timing delays in the identification and flagging of a SICR.
Other – The PMAs in the other businesses were for similar reasons as
those described above.
Significant increase in credit risk (SICR)
Exposures that are considered significantly credit deteriorated since
initial recognition are classified in Stage 2 and assessed for lifetime
ECL measurement (exposures not considered deteriorated carry a 12
month ECL). NatWest Group has adopted a framework to identify
deterioration based primarily on relative movements in lifetime PD
supported by additional qualitative backstops. The principles applied
are consistent across NatWest Group and align to credit risk
management practices, where appropriate.
The framework comprises the following elements:
IFRS 9 lifetime PD assessment (the primary driver) – on modelled
portfolios, the assessment is based on the relative deterioration in
forward-looking lifetime PD and is assessed monthly. To assess
whether credit deterioration has occurred, the residual lifetime PD
at balance sheet date (which PD is established at date of initial
recognition (DOIR)) is compared to the current PD. If the current
lifetime PD exceeds the residual origination PD by more than a
threshold amount, deterioration is assumed to have occurred and
the exposure transferred to Stage 2 for a lifetime loss assessment.
For Wholesale, a doubling of PD would indicate a SICR subject to
a minimum PD uplift of 0.1%. For Personal portfolios, the criteria
vary by risk band, with lower risk exposures needing to deteriorate
more than higher risk exposures, as outlined in the following table:
Personal
risk bands
Risk band A
Risk band B
Risk band C
PD bandings (based on
residual lifetime
PD calculated at DOIR)
<0.762%
<4.306%
>=4.306%
Qualitative high-risk backstops – the PD assessment is
PD deterioration
threshold criteria
PD@DOIR + 1%
PD@DOIR + 3%
1.7 x PD@DOIR
complemented with the use of qualitative high-risk backstops to
further inform whether significant deterioration in lifetime risk of
default has occurred. The qualitative high-risk backstop
assessment includes the use of the mandatory 30+ days past due
backstop, as prescribed by IFRS 9 guidance, and other features
such as forbearance support, Wholesale exposures managed
within the Risk of Credit Loss framework, and adverse credit
bureau results for Personal customers. Where a Personal customer
was granted a payment holiday (also referred to as a payment
deferral) in response to COVID-19, they were not automatically
transferred into Stage 2. However, a subset of Personal customers
who had accessed payment holiday support, and where their risk
profile was identified as relatively high risk, were collectively
migrated to Stage 2 (if not in Stage 2 already). Any support
provided beyond completion of the second payment holiday was
considered forbearance. Wholesale customers accessing the
various COVID-19 support mechanisms were assessed as detailed
in the Impact of COVID-19 section.
Persistence (Personal and business banking customers only) – the
persistence rule ensures that accounts which have met the criteria
for PD driven deterioration are still considered to be significantly
deteriorated for three months thereafter. This additional rule
enhances the timeliness of capture in Stage 2. The persistence rule
is applied to PD driven deterioration only.
The criteria are based on a significant amount of empirical analysis
and seek to meet three key objectives:
Criteria effectiveness – the criteria should be effective in identifying
significant credit deterioration and prospective default population.
Stage 2 stability – the criteria should not introduce unnecessary
volatility in the Stage 2 population.
Portfolio analysis – the criteria should produce results which are
intuitive when reported as part of the wider credit portfolio.
NatWest Group Annual Report and Accounts 2020
171
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Provisioning for forbearance
Personal
The methodology used for provisioning in respect of Personal forborne
loans will differ depending on whether the loans are performing or non-
performing and which business is managing them due to local market
conditions.
Asset lifetimes
The choice of initial recognition and asset duration is another critical
judgement in determining the quantum of lifetime losses that apply.
The date of initial recognition reflects the date that a transaction (or
account) was first recognised on the balance sheet; the PD
recorded at that time provides the baseline used for subsequent
determination of SICR as detailed above.
For asset duration, the approach applied (in line with IFRS 9
requirements) is:
o Term lending – the contractual maturity date, reduced for
behavioural trends where appropriate (such as, expected
prepayment and amortisation).
o Revolving facilities – for Personal portfolios (except credit cards),
asset duration is based on behavioural life and this is normally
greater than contractual life (which would typically be overnight).
For Wholesale portfolios, asset duration is based on annual
counterparty review schedules and will be set to the next review
date.
In the case of credit cards, the most significant judgement is to reflect
the operational practice of card reissuance and the associated credit
assessment as enabling a formal re-origination trigger. As a
consequence, a capped lifetime approach of up to 36 months is used
on credit card balances. If the approach was uncapped the ECL
impact is estimated at approximately £110 million (2019 – £90 million).
However, credit card balances originated under the 0% balance
transfer product, and representing approximately 12% of drawn cards
balances, have their ECL calculated on a behavioural life-time
approach as opposed to being capped at a maximum of three years.
The capped approach reflects NatWest Group practice of a credit-
based review of customers prior to credit card issuance and complies
with IFRS 9. Benchmarking information indicates that peer UK banks
use behavioural approaches in the main for credit card portfolios with
average durations between three and ten years. Across Europe,
durations are shorter and are, in some cases, as low as one year.
Granting forbearance will only change the arrears status of the loan in
specific circumstances, which can include capitalisation of principal
and interest in arrears, where the loan may be returned to the
performing book if the customer has demonstrated an ability to meet
regular payments and is likely to continue to do so.
The loan would continue to be reported as forborne until it meets the
exit criteria set out by the European Banking Authority.
Additionally, for some forbearance types, a loan may be transferred to
the performing book if a customer makes payments that reduce loan
arrears below 90 days (Retail Banking collections function).
For ECL provisioning, all forborne but performing exposures are
categorised as Stage 2 and are subject to a lifetime loss provisioning
assessment.
For non-performing forborne loans, the Stage 3 loss assessment
process is the same as for non-forborne loans.
In the absence of any other forbearance or SICR triggers, customers
granted COVID-19 related payment holidays were not considered
forborne. However, any support provided beyond completion of a
second payment holiday is considered forbearance.
Wholesale
Provisions for forborne loans are assessed in accordance with normal
provisioning policies. The customer’s financial position and prospects
– as well as the likely effect of the forbearance, including any
concessions granted, and revised PD or LGD gradings – are
considered in order to establish whether an impairment provision
increase is required.
Wholesale loans granted forbearance are individually assessed in
most cases. Performing loans subject to forbearance treatment are
categorised as Stage 2 and subject to a lifetime loss assessment.
Forbearance may result in the value of the outstanding debt exceeding
the present value of the estimated future cash flows. This difference
will lead to a customer being classified as non-performing.
In the case of non-performing forborne loans, an individual loan
impairment provision assessment generally takes place prior to
forbearance being granted. The amount of the loan impairment
provision may change once the terms of the forbearance are known,
resulting in an additional provision charge or a release of the provision
in the period the forbearance is granted.
The transfer of Wholesale loans from impaired to performing status
follows assessment by relationship managers and credit. When no
further losses are anticipated and the customer is expected to meet
the loan’s revised terms, any provision is written-off or released and
the balance of the loan returned to performing status. This is not
dependent on a specified time period and follows the credit risk
manager’s assessment.
Customers seeking COVID-19 related support, including payment
holidays, who were not subject to any wider SICR triggers and who
were assessed as having the ability in the medium term post-COVID-
19 to be viable and meet credit appetite metrics, were not considered
to have been granted forbearance. Refer to the Impact of COVID-19
section for further details.
NatWest Group Annual Report and Accounts 2020
172
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Economic loss drivers
Introduction
The portfolio segmentation and selection of economic loss drivers for
IFRS 9 follow closely the approach used in stress testing. To enable
robust modelling the forecasting models for each portfolio segment
(defined by product or asset class and where relevant, industry sector
and region) are based on a selected, small number of economic
factors, (typically three to four) that best explain the temporal
variations in portfolio loss rates. The process to select economic loss
drivers involves empirical analysis and expert judgement.
The most material economic loss drivers for the Personal portfolio
include unemployment rates, house price indices and the Bank of
England and the European Central Bank base rates. For the
Wholesale portfolio, in addition to interest and unemployment rates,
national GDP, stock price indices and world GDP are primary loss
drivers.
Downside – This scenario assumes the rollout of the COVID-19
vaccine is slower compared to base case, leading to a more sluggish
recovery. Business confidence is slower to return while households
remain more cautious. This scenario assumes that the labour market
and asset market damage is greater than in the base case.
Unemployment peaks at 9.4%, surpassing the financial crisis peak and
causing more scarring.
Extreme downside – This scenario assumes a new variant of COVID-
19 necessitates a new vaccine, which substantially slows the speed of
rollout, prolonging the recovery. There is a renewed sharp downturn in
the economy in 2021. Firms react by shedding labour in significant
numbers, leading to a very difficult recovery with the unemployment
rate surpassing the levels seen in the 1980s. There are very sharp
declines in asset prices. The recovery is tepid throughout the five-year
period, meaning only a gradual decline in joblessness.
Economic scenarios
As at 31 December 2020, the range of anticipated future economic
conditions was defined by a set of four internally developed scenarios
and their respective probabilities. They comprised upside, base case,
downside and extreme downside scenarios. The scenarios primarily
reflect a range of outcomes for the path of COVID-19 and associated
effects on labour and asset markets. The scenarios were consistent
with the UK-EU Trade and Cooperation Agreement and are
summarised as follows:
In contrast, as at 31 December 2019, NatWest Group used five
discrete scenarios to characterise the distribution of risks in the
economic outlook. For 2020, the four scenarios were deemed
appropriate in capturing the uncertainty in economic forecasts and the
non-linearity in outcomes under different scenarios. These four
scenarios were developed to provide sufficient coverage across
potential rises in unemployment, asset price falls and the degree of
permanent damage to the economy, around which there are
pronounced levels of uncertainty at this stage.
Upside – This scenario assumes a very strong recovery through 2021,
facilitated by a very rapid rollout of the vaccine. Economic output
regains its pre-COVID-19 peak by the end of the year. The rebound in
consumer spending from an easing in lockdown restrictions is rapid,
enabling a more successful reabsorption of furloughed labour
compared to the base case. That limits the rise in unemployment.
Consequently, the effect on asset prices is more limited compared to
the base case.
Base case – The current lockdown restrictions are gradually loosened
enabling a recovery over the course of 2021. The rollout of the
vaccines proceeds as planned. Consumer spending rebounds as
accumulated household savings are spent, providing support to the
recovery in consumer-facing service sectors. Unemployment rises
through to the second half of 2021, peaking at 7%, before gradually
retreating. Housing activity slows in the second half of 2021 with a very
limited decline in prices.
The tables and commentary below provide details of the key economic
loss drivers under the four scenarios.
The main macroeconomic variables for each of the four scenarios
used for ECL modelling are set out in the main macroeconomic
variables table below. The compound annual growth rate (CAGR) for
GDP is shown. It also shows the five-year average for unemployment
and the Bank of England base rate. The House Price Inflation and
commercial real estate figures show the total change in each asset
over five years.
Main macroeconomic variables
2020
2019
Five-year summary
UK
GDP - CAGR
Unemployment - average
House Price Inflation - total change
Bank of England base rate - average
Commercial real estate price - total change
Republic of Ireland
GDP - CAGR
Unemployment - average
House Price Inflation - total change
European Central Bank base rate - average
World GDP - CAGR
Probability weight
Upside
Base case
Downside
downside
Upside 2
Upside 1
Base case Downside 1 Downside 2
Extreme
%
3.6
4.4
12.5
0.2
4.3
4.2
5.6
21.0
0.1
3.5
%
3.1
5.7
7.6
—
0.7
3.5
7.5
13.3
—
3.4
%
%
%
%
%
%
%
2.8
7.1
4.4
(0.1)
(12.0)
3.0
9.3
6.8
—
2.9
1.3
9.7
(19.0)
(0.5)
(31.5)
1.6
11.2
(7.0)
—
2.5
3.6
22.4
1.0
13.0
3.8
4.0
29.3
1.5
2.3
3.9
17.6
0.7
8.1
3.5
4.3
25.7
0.8
1.6
4.4
8.3
0.3
(1.3)
2.7
4.8
15.5
—
1.3
4.6
4.0
—
(5.8)
2.3
5.6
10.8
—
2.8
3.9
3.3
2.8
2.5
0.9
5.2
(5.1)
—
(15.1)
1.8
6.8
4.2
—
2.0
20.0
40.0
30.0
10.0
12.7
14.8
30.0
29.7
12.7
Note:
(1) The five year period starts at Q3 2020 for 2020 and Q3 2019 for 2019.
NatWest Group Annual Report and Accounts 2020
173
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Economic loss drivers
UK gross domestic product
115
105
95
85
75
Q4 2019
Q4 2020
Q4 2021
Q4 2023
Q4 2024
Q4 2025
Q4 2026
Upside
Base
Downside
Extreme Downside
Annual figures
GDP - annual growth
UK
2020
2021
2022
2023
2024
2025
Upside Base case
Downside
downside
Upside Base case
Downside
downside
Extreme
Extreme
%
(9.3)
9.0
2.6
2.2
2.3
2.3
%
(10.9)
4.5
4.2
3.2
2.8
2.4
%
(11.1)
2.6
4.6
3.2
3.1
2.6
% Republic of Ireland
(12.3) 2020
(4.6) 2021
6.1 2022
4.0 2023
2.3 2024
2.3 2025
%
(1.6)
9.9
5.2
3.1
1.9
2.1
%
(2.2)
5.2
5.2
3.5
2.7
2.6
%
(2.7)
0.8
4.6
3.9
3.8
3.8
%
(4.9)
(6.4)
8.4
5.9
2.5
2.4
Extreme
Unemployment rate - annual average
Extreme
Upside Base case
Downside
downside
Upside Base case
Downside
downside
UK
2020
2021
2022
2023
2024
2025
%
4.4
5.6
4.5
3.8
3.8
3.9
%
4.4
6.3
6.3
5.5
5.1
5.1
%
4.9
8.5
7.7
6.7
6.2
6.2
% Republic of Ireland
5.4 2020
12.3 2021
12.0 2022
9.0 2023
7.5 2024
7.3 2025
House Price Inflation - four quarter growth
Extreme
%
11.6
7.2
5.1
4.4
4.5
4.6
%
11.9
9.4
7.4
6.5
6.2
6.1
%
12.1
11.4
9.6
8.6
7.8
7.2
%
13.0
14.9
11.7
9.6
8.6
8.5
Extreme
UK
2020
2021
2022
2023
2024
2025
Upside Base case
Downside
downside
Upside Base case
Downside
downside
%
2.7
2.2
1.7
2.2
2.8
3.1
%
1.5
(3.0)
3.6
2.2
2.8
3.1
%
(1.8)
(7.4)
6.5
4.6
2.8
3.1
% Republic of Ireland
(5.2) 2020
(26.9) 2021
5.1 2022
5.0 2023
5.6 2024
3.1 2025
%
2.3
3.6
3.3
2.9
3.3
4.2
%
(0.1)
(4.1)
3.8
4.1
4.9
4.6
%
(0.8)
(12.9)
3.4
5.9
7.6
5.4
%
(3.2)
(24.9)
7.4
7.4
5.7
5.5
Commercial real estate price - four quarter growth
Extreme
UK
2020
2021
2022
2023
2024
2025
Upside Base case
Downside
downside
%
(7.7)
2.6
0.3
0.4
1.2
1.2
%
(9.5)
(2.6)
5.7
(0.4)
0.4
1.2
%
(16.6)
(15.9)
10.8
3.2
1.6
1.2
%
(21.4)
(26.6)
3.2
3.2
3.2
1.2
NatWest Group Annual Report and Accounts 2020
174
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Worst points
The worst points refer to the worst four-quarter rate of change for GDP, House Price Inflation and commercial real estate price and the worst
quarterly figures for unemployment between 2020 and 2025.
UK
GDP (year-on-year)
Unemployment
House Price Inflation (year-on-year)
Commercial real estate price (year-on-year)
Republic of Ireland
GDP (year-on-year)
Unemployment
House Price Inflation (year-on-year)
Peak (Q3 2020 to trough)
UK
GDP
House Price Inflation
Commercial real estate price
Republic of Ireland
GDP
House Price Inflation
31 December 2020
31 December 2019
Upside Base case
Downside
%
(21.5)
5.9
1.4
(7.7)
%
(21.5)
7.0
(3.6)
(12.3)
%
(21.5)
9.4
(11.2)
(29.7)
Extreme
downside
%
(21.5)
13.9
(29.8)
(41.1)
Downside 1 Downside 2
(0.2)
4.9
(3.5)
(8.2)
%
(1.8)
5.5
(8.4)
(12.6)
31 December 2020
31 December 2019
Downside 1 Downside 2
0.5
5.8
(2.6)
%
(2.1)
7.3
(8.4)
Upside Base case
Downside
%
(4.4)
16.5
(0.6)
%
(6.7)
16.5
(4.2)
%
(8.4)
16.5
(13.3)
31 December 2020
Upside Base case
Downside
%
—
—
(3.4)
%
(1.8)
(3.6)
(10.1)
%
(5.1)
(11.2)
(28.9)
31 December 2020
Upside Base case
Downside
%
(0.6)
—
%
(3.0)
(4.2)
%
(5.5)
(13.3)
Extreme
downside
%
(17.0)
18.1
(24.9)
Extreme
downside
%
(10.4)
(32.0)
(40.4)
Extreme
downside
%
(13.8)
(27.0)
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
175
UK economic uncertainty
Treatment of COVID-19 relief mechanisms
Use of COVID-19 relief mechanisms (for example, payment holidays,
CBILS and BBLS) will not automatically merit identification of SICR
and trigger a Stage 2 classification in isolation. However, a subset of
Personal customers who had accessed payment holiday support, and
where their risk profile was identified as relatively high risk were
collectively migrated to Stage 2 (if not already captured by other SICR
criteria).
For Wholesale customers, NatWest Group continues to provide
support, where appropriate, to existing customers. Those who are
deemed either (a) to require a prolonged timescale to return to within
NatWest Group’s risk appetite, (b) not to have been viable pre-COVID-
19, or (c) not to be able to sustain their debt once COVID-19 is over,
will trigger a SICR and, if concessions are sought, be categorised as
forborne, in line with regulatory guidance.
As some of the government support mechanisms conclude, NatWest
Group anticipates further credit deterioration in the portfolios. There
are a number of key factors that could drive further downside to
impairments, through deteriorating economic and credit metrics and
increased stage migration as credit risk increases for more customers.
A key factor would be a more adverse deterioration in GDP and
unemployment in the economies in which NatWest Group operates,
but also, among others:
The timing and nature of governmental exit plans from lockdown,
notably in the UK and the Republic of Ireland, and any future
repeated lockdown requirements.
The progress of COVID-19, with potential for changes in
worker/consumer behaviour and sickness levels.
The efficacy of the various government support initiatives in terms
of their ability to defray customer defaults is yet to be proven,
notably over an extended period.
Any further damage to certain supply chains, most notably in the
case of any re-tightening of lockdown rules but also delays caused
by social distancing measures and possible export/import controls.
The level of revenues lost by corporate clients and pace of
recovery of those revenues may affect NatWest Group’s clients’
ability to service their borrowing, especially in those sectors most
exposed to the impacts of COVID-19.
Higher unemployment if companies fail to restart jobs after periods
of staff furlough.
This could potentially lead to further ECL increases. However, the
income statement impact of this will be mitigated to some extent by the
forward-looking provisions taken as at 31 December 2020.
Risk and capital management
Credit risk continued
Economic loss drivers
Probability weightings of scenarios
NatWest Group’s approach to IFRS 9 multiple economic scenarios
(MES) involves selecting a suitable set of discrete scenarios to
characterise the distribution of risks in the economic outlook and
assigning appropriate probability weights. The scale of the economic
impact of COVID-19 and the range of recovery paths necessitates a
change of approach to assigning probability weights from that used in
recent updates. Previously GDP paths for NatWest Group’s scenarios
were compared against a set of 1,000 model runs, following which a
percentile in the distribution was established that most closely
corresponded to the scenario. This approach does not produce
meaningful outcomes in the current circumstances because GDP is
highly volatile and highly uncertain.
Instead, NatWest Group has subjectively applied probability weights,
reflecting expert views within NatWest Group. The probability weight
assignment was judged to present good coverage to the central
scenarios and the potential for a far more robust recovery on the
upside and exceptionally challenging outcomes on the downside. A
20% weighting was applied to the upside scenario, a 40% weighting
applied to the base case scenario, a 30% weighting applied to the
downside scenario and a 10% weighting applied to the extreme
downside scenario. NatWest Group judged a downside-biased
weighting as appropriate given the risk to the outlook posed by the
numerous factors influencing the path of COVID-19, the rollout of the
vaccine and the pace at which social distancing restrictions can be
relaxed.
Use of the scenarios in Personal lending
Personal lending follows a discrete scenario approach which means
that for each account, PD and LGD values are calculated as
probability weighted averages across the individual, discrete economic
scenarios. The PD values for each discrete scenario are in turn
calculated using product specific econometric models that aggregate
forecasts of the relevant economic loss drivers into forecasts of the
exogenous component of the respective PD models (refer to IFRS 9
ECL model design principles).
Use of the scenarios in Wholesale lending
The Wholesale lending methodology is based on the concept of CCIs.
The CCIs represent, similar to the exogenous component in Personal,
all relevant economic loss drivers for a region/industry segment
aggregated into a single index value that describes the loss rate
conditions in the respective segment relative to its long-run average. A
CCI value of zero corresponds to loss rates at long-run average levels,
a positive CCI value corresponds to loss rates below long-run average
levels and a negative CCI value corresponds to loss rates above long-
run average levels.
The four economic scenarios are translated into forward-looking
projections of CCIs using a set of econometric models. Subsequently
the CCI projections for the individual scenarios are averaged into a
single central CCI projection according to the given scenario
probabilities. The central CCI projection is then overlaid with an
additional mean reversion assumption, i.e. that after one to two years
into the forecast horizon the CCI gradually revert to their long-run
average of zero.
Finally, ECL is calculated using a Monte Carlo approach by averaging
PD and LGD values arising from many CCI paths simulated around
the central CCI projection.
The rationale for the Wholesale approach is the long-standing
observation that loss rates in Wholesale portfolios tend to follow
regular cycles. This allows NatWest Group to enrich the range and
depth of future economic conditions embedded in the final ECL
beyond what would be obtained from using the discrete macro-
economic scenarios alone.
Business banking, while part of the Wholesale segment, for reporting
purposes, utilises the Personal lending rather than the Wholesale
lending methodology.
NatWest Group Annual Report and Accounts 2020
176
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Model monitoring and enhancement
The abrupt and prolonged interruption of a wide range of economic
activities due to COVID-19 and the subsequent government
interventions to support businesses and individuals, has resulted in
patterns in the data of key economic loss drivers and loss outcomes,
that are markedly different from those that NatWest Group’s models
have been built on. To account for these structural changes, model
adjustments have been applied and model changes have been
implemented.
Government support
Most notably as a result of various government support measures, the
increase in model-predicted defaults caused by the sharp contraction
in GDP and consumer spending in Q2 2020 has to date not
materialised.
Accordingly, model-projected default rates in Wholesale and Personal
have been adjusted by introducing lags of up to 12 months. These lags
are based partly on objective empirical data (i.e. the absence of
increases in realised default rates by the reporting date) and partly
judgmental, based on the extension of government support measures
into 2021 and their expected effectiveness.
In Wholesale lending, most importantly business and commercial
banking, model-projected default rates have also been scaled down
based on the expectation that credit extended under various
government support loan schemes will allow many businesses, not
only to delay, but to sustainably mitigate their default risk profile.
Extreme GDP movements – Wholesale only
Due to the specific nature of COVID-19, GDP year-on-year
movements in both directions are extremely sharp, many multiples of
their respective extremes observed previously.
This creates a risk of overstretched, invalid extrapolations in statistical
models. Therefore, all Wholesale econometric models were updated to
make them robust against extreme GDP movements by capping
projected CCI values at levels corresponding to three times the default
rates observed at the peak of the global financial crisis and using
quarterly averages rather than spot values for CCI projections.
Industry sector detail – Wholesale only
The economic impact of COVID-19 is highly differentiated by industry
sector, with hospitality and other contact-based leisure, service, travel
and passenger transport activities significantly more affected than the
overall economy. On the other hand, the corporate and commercial
econometric forecasting models used in Wholesale are sector
agnostic. Sector performance was therefore monitored throughout the
year and additional adjustments were applied when PDs were deemed
inconsistent with expected loss outcomes at sector level. No such
interventions were necessary at the year end.
Scenario sensitivity – Personal only
For the Personal lending portfolio, the forward-looking components of
the IFRS 9 PD models were modified, leveraging existing econometric
models used in stress testing to ensure that PDs appropriately reflect
the forecasts for unemployment and house prices in particular.
All in-model adjustments described have been applied by correcting
the PD and LGD estimates within the core ECL calculation process
and therefore consistently and systematically inform SICR
identification and ECL measurement.
Additionally, post model ECL adjustments were made in Personal to
ensure that the ECL was adjusted for known model over and under-
predictions pre-existing COVID-19, pending the systematic re-
calibration of the underlying models.
Government guarantees
During 2020, the UK government launched a series of temporary
schemes designed to support businesses deal with the impact of
COVID-19. The BBLS, CBILS and CLBILS lending products are
originated by NatWest Group but are covered by government
guarantees. These are to be set against the outstanding balance of a
defaulted facility after the proceeds of the business assets have been
applied. The government guarantee is 80% for CBILS and CLBILS and
100% for BBLS. NatWest Group recognises lower LGDs for these
lending products as a result, with 0% applied to the government
guaranteed part of the exposure.
Notwithstanding the government guarantees, NatWest Group’s
measurements of PD are unaffected and NatWest Group continues to
move exposures to Stage 2 and Stage 3 where a significant
deterioration in credit risk or a default is identified.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Wholesale support schemes
The table below shows the uptake of Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and
Coronavirus Large Business Interruption Loan Scheme (CLBILS) in Wholesale, by sector.
2020
Wholesale lending by sector
Airlines and aerospace
Automotive
Education
Health
Land transport and logistics
Leisure
Oil and gas
Retail
Property
Other (including Business
Banking)
Total
BBLS
CBILS
CLBILS
Approved
Drawdown % of BBLS to
Approved
Drawdown % of CBILS to
Approved
Drawdown % of CLBILS to
volume
amount (£m)
sector loans
volume
amount (£m)
sector loans
volume
amount (£m)
sector loans
253
12,301
1,943
9,821
8,575
31,148
303
31,315
67,698
118,486
281,843
7
416
53
314
255
989
9
1,078
1,996
3,181
8,298
0.35%
6.60%
3.24%
5.41%
5.31%
10.07%
0.58%
11.75%
5.24%
21
553
111
601
365
1,983
15
1,548
2,350
9
139
73
101
97
512
8
416
664
3.57%
8,504
4.93% 16,051
1,752
3,771
0.45%
2.21%
4.46%
1.74%
2.02%
5.21%
0.51%
4.54%
1.74%
1.97%
2.24%
4
31
11
3
3
34
29
41
86
242
8
58
37
24
5
173
121
133
267
826
0.40%
0.92%
2.26%
0.41%
0.10%
1.76%
-
1.32%
0.35%
0.30%
0.49%
Notes:
(1) The UK government has extended these support schemes to 31 March 2021 and NatWest Group continues to lend under the schemes to customers who meet
the applicable lending criteria.
(2) The table contains some cases which as at 31 December 2020 were approved but not yet drawn down. Approved limits as at 31 December 2020 were as
follows: BBLS – £8.6 billion (96% drawn); CBILS – £4.2 billion (91% drawn); and CLBILS – £1.3 billion (62% drawn).
NatWest Group Annual Report and Accounts 2020
177
Risk and capital management
Credit risk continued
Measurement uncertainty and ECL sensitivity analysis
The recognition and measurement of ECL is complex and involves the
use of significant judgement and estimation, particularly in times of
economic volatility and uncertainty. This includes the formulation and
incorporation of multiple forward-looking economic conditions into ECL
to meet the measurement objective of IFRS 9. The ECL provision is
sensitive to the model inputs and economic assumptions underlying
the estimate.
The focus of the simulations is on ECL provisioning requirements on
performing exposures in Stage 1 and Stage 2. The simulations are run
on a stand-alone basis and are independent of each other; the
potential ECL impacts reflect the simulated impact as at 31 December
2020. Scenario impacts on SICR should be considered when
evaluating the ECL movements of Stage 1 and Stage 2. In all
scenarios the total exposure was the same but exposure by stage
varied in each scenario.
Stage 3 provisions are not subject to the same level of measurement
uncertainty – default is an observed event as at the balance sheet
date. Stage 3 provisions therefore have not been considered in this
analysis.
The impact arising from the upside, downside and extreme downside
scenarios has been simulated. These scenarios are three of the four
discrete scenarios used in the methodology for Personal multiple
economic scenarios as described in the Economic loss drivers section.
In the simulations, NatWest Group has assumed that the economic
macro variables associated with these scenarios replace the existing
base case economic assumptions, giving them a 100% probability
weighting and thus serving as a single economic scenario.
These scenarios have been applied to all modelled portfolios in the
analysis below, with the simulation impacting both PDs and LGDs.
Modelled overlays present in the underlying ECL estimates are also
sensitised in line with the modelled ECL movements, but those that
were judgmental in nature, primarily those for economic uncertainty,
were not (refer to the Governance and post model adjustments
section). As expected, the scenarios create differing impacts on ECL
by portfolio and the impacts are deemed reasonable. In this simulation,
it is assumed that existing modelled relationships between key
economic variables and loss drivers hold, but in practice other factors
would also have an impact, for example, potential customer behaviour
changes and policy changes by lenders that might impact on the wider
availability of credit.
NatWest Group’s core criterion to identify a SICR is founded on PD
deterioration, as discussed above. Under the simulations, PDs change
and result in exposures moving between Stage 1 and Stage 2
contributing to the ECL impact.
The simulated ECL impacts in the December 2020 sensitivity analysis
were significantly higher than in the sensitivity analysis carried out at
December 2019 (refer to the NatWest Group plc (formerly The Royal
Bank of Scotland Group plc) 2019 Annual Report and Accounts for
further details). The relative ECL movements across the scenarios
were reflective of a higher actual reported ECL, including certain
treatments to capture the idiosyncratic risk of COVID-19, with the
economics in the extreme downside scenario significantly more
adverse than in the 2019 downside 2 scenario.
NatWest Group Annual Report and Accounts 2020
178
Risk and capital management
Credit risk continued
Measurement uncertainty and ECL sensitivity analysis
2020
Stage 1 modelled exposure (£m)
Retail Banking
Ulster Bank RoI Personal & Business Banking
Wholesale
Stage 1 modelled ECL (£m)
Retail Banking
Ulster Bank RoI Personal & Business Banking
Wholesale
Stage 1 coverage (%)
Retail Banking
Ulster Bank RoI Personal & Business Banking
Wholesale
Stage 2 modelled exposure (£m)
Retail Banking
Ulster Bank RoI Personal & Business Banking
Wholesale
Stage 2 modelled ECL (£m)
Retail Banking
Ulster Bank RoI Personal & Business Banking
Wholesale
Stage 2 coverage (%)
Retail Banking
Ulster Bank RoI Personal & Business Banking
Wholesale
Stage 1 and Stage 2 modelled exposure (£m)
Retail Banking
Ulster Bank RoI Personal & Business Banking
Wholesale
Stage 1 and Stage 2 modelled ECL (£m)
Retail Banking
Ulster Bank RoI Personal & Business Banking
Wholesale
Stage 1 and Stage 2 coverage (%)
Retail Banking
Ulster Bank RoI Personal & Business Banking
Wholesale
Reconciliation to Stage 1 and Stage 2 ECL (£m)
ECL on modelled exposures
ECL on non-modelled exposures
Total Stage 1 and Stage 2 ECL
Variance – (lower)/higher to actual total Stage 1 and Stage 2 ECL
Actual
Upside
Downside
135,017
11,124
115,572
261,713
136,977
11,318
124,501
272,796
133,600
11,030
114,149
258,779
Extreme
downside
99,170
9,590
96,616
205,376
124
27
322
473
0.09%
0.24%
0.28%
0.18%
32,942
1,738
45,194
79,874
897
95
2,066
3,058
2.72%
5.47%
4.57%
3.83%
94
25
316
435
0.07%
0.22%
0.25%
0.16%
30,982
1,544
36,265
68,791
665
83
1,504
2,252
2.15%
5.38%
4.15%
3.27%
128
29
331
488
0.10%
0.26%
0.29%
0.19%
34,359
1,832
46,617
82,808
968
107
2,214
3,289
2.82%
5.84%
4.75%
3.97%
130
29
311
470
0.13%
0.30%
0.32%
0.23%
68,789
3,272
64,150
136,211
1,727
152
3,376
5,255
2.51%
4.65%
5.26%
3.86%
167,959
12,862
160,766
341,587
167,959
12,862
160,766
341,587
167,959
12,862
160,766
341,587
167,959
12,862
160,766
341,587
1,021
122
2,388
3,531
0.61%
0.95%
1.49%
1.03%
3,531
68
3,599
759
108
1,820
2,687
0.45%
0.84%
1.13%
0.79%
2,687
68
2,755
(844)
1,096
136
2,545
3,777
0.65%
1.06%
1.58%
1.11%
3,777
68
3,845
246
1,857
181
3,687
5,725
1.11%
1.41%
2.29%
1.68%
5,725
68
5,793
2,194
Notes:
(1) Variations in future undrawn exposure values across the scenarios are modelled, however the exposure position reported is that used to calculate modelled
ECL as at 31 December 2020 and therefore does not include variation in future undrawn exposure values.
(2) Reflects ECL for all modelled exposure in scope for IFRS 9; in addition to loans this includes bonds and cash. The analysis excludes non-modelled portfolios
and exposure relating to bonds and cash.
(3) All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL impact reflecting the simulated impact as at 31
December 2020. The simulations change the composition of Stage 1 and Stage 2 exposure but total exposure is unchanged under each scenario as the loan
population is static.
(4) Refer to the Economic loss drivers section for details of economic scenarios.
(5) 2019 comparatives are not included as the sensitivity scenario analysis relates to the 31 December 2020 balance sheet position. Refer to the NatWest Group
plc (formerly The Royal Bank of Scotland Group plc) 2019 Annual Report and Accounts for the sensitivity analysis carried out at that time.
NatWest Group Annual Report and Accounts 2020
179
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk continued
Key points
During 2020, ECL increased materially as a result of COVID-19
disruption and a negative economic outlook. Downside risk
persisted and was reflected in the scenario weightings with heavier
weighting to the downside than to the upside. Judgemental ECL
post model adjustments reflected heightened uncertainty and
expectation of increased defaults in 2021 and beyond. To a certain
extent, these adjustments dampen the ECL uplift in the downside
scenario, particularly in Wholesale which had already observed a
larger proportionate increase in actual reported ECL and coverage.
If the economics were as negative as observed in the extreme
downside, overall Stage 1 and Stage 2 ECL was simulated to
increase by over 60%. The non-linearity was more apparent in the
Personal portfolio driven by mortgages, with the ECL mitigation
impact of Wholesale portfolio securitisations observed in downside
scenarios, where ECL did not increase to the same extent.
The relatively small ECL uplift in the downside scenario (£246
million, 7% of actual) reflected the weighting within the multiple
economic scenarios used in the actual reported ECL to the
downside.
In the upside scenario, the simulated ECL reduction (£844 million,
24% of actual) was lower than the uplift observed in the extreme
downside (£2.2 billion), again reflecting the expectation that the
non-linearity of losses was skewed to the downside.
The simulated value of exposures in Stage 2 increased significantly
in the extreme downside and was the key driver of the simulated
ECL increase. The movement in Stage 2 balances in the other
simulations was less marked, with the exception of Wholesale,
where a significant reduction was observed in the upside scenario
reflecting the sensitivity of SICR criteria to relatively small
movements in PD.
In a separate simulation covering the base case economic scenario
(one of the multiple economic scenarios), and assuming a 100%
weighting to that scenario, the total Stage 1 and Stage 2 ECL was
simulated to be approximately 8% lower than the actual reported
ECL.
Credit risk – Banking activities
Introduction
This section details the credit risk profile of NatWest Group’s banking activities. Refer to Accounting policy 13 and Note 14 to the consolidated
financial statements for policies and critical judgements relating to impairment loss determination.
Financial instruments within the scope of the IFRS 9 ECL framework
Refer to Note 11 to the consolidated financial statements for balance sheet analysis of financial assets that are classified as amortised cost or
fair value through other comprehensive income (FVOCI), the starting point for IFRS 9 ECL framework assessment.
Financial assets
Balance sheet total gross amortised cost and FVOCI
In scope of IFRS 9 ECL framework
% in scope
Loans - in scope
Stage 1
Stage 2
Stage 3
Other financial assets - in scope
Stage 1
Stage 2
Out of scope of IFRS 9 ECL framework
2020
£bn
555.0
548.8
99%
372.3
287.1
78.9
6.3
176.5
175.5
1.0
6.2
2019*
£bn
484.3
475.5
98%
336.9
302.4
27.9
6.6
138.6
138.6
—
8.8
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
The assets outside the IFRS 9 ECL framework were as follows:
Settlement balances, items in the course of collection, cash
balances and other non-credit risk assets of £4.1 billion (2019 –
£6.1 billion). These were assessed as having no ECL unless there
was evidence that they were credit impaired.
Equity shares of £0.3 billion (2019 – £0.9 billion) as not within the
IFRS 9 ECL framework by definition.
Fair value adjustments on loans hedged by interest rate swaps,
where the underlying loan was within the IFRS 9 ECL scope – £1.4
billion (2019 – £1.1 billion).
NatWest Group-originated securitisations, where ECL was captured
on the underlying loans of £0.4 billion (2019 – £0.4 billion).
Contingent liabilities and commitments
In addition to contingent liabilities and commitments disclosed in Note
26 to the consolidated financial statements – reputationally-committed
limits are also included in the scope of the IFRS 9 ECL framework.
These are offset by £0.2 billion (2019 – £2.6 billion) out of scope
balances primarily related to facilities that, if drawn, would not be
classified as amortised cost or FVOCI, or undrawn limits relating to
financial assets exclusions. Total contingent liabilities (including
financial guarantees) and commitments within IFRS 9 ECL scope of
£133.6 billion (2019 – £127.9 billion) comprised Stage 1 £107.4 billion
(2019 – £121.7 billion); Stage 2 £25.2 billion (2019 – £5.6 billion) and
Stage 3 £1.0 billion (2019 – £0.6 billion).
NatWest Group Annual Report and Accounts 2020
180
Risk and capital management
Credit risk – Banking activities continued
Portfolio summary – segment analysis
The table below shows gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework.
Private
RBS
Banking International
£m
£m
15,321
1,939
298
298
—
17,558
31
68
39
39
—
138
0.20
3.51
13.09
0.79
100
25
60
15
15
—
57
5
5
—
12,143
2,242
211
211
—
14,596
14
74
48
48
—
136
0.12
3.30
22.75
0.93
107
8
71
28
28
—
73
3
3
—
NatWest Central items
& other
Markets
£m
£m
7,780
1,566
171
162
9
9,517
12
49
132
124
8
193
0.15
3.13
77.19
2.03
40
(2)
54
(12)
(3)
(9)
42
11
11
—
26,859
110
—
—
—
26,969
13
15
—
—
—
28
0.05
13.64
—
0.10
26
10
15
1
—
1
10
—
—
—
Total
£m
287,124
78,917
6,358
2,292
4,066
372,399
519
3,081
2,586
831
1,755
6,186
0.18
3.90
40.67
1.66
3,242
(121)
2,747
616
194
422
87
937
191
746
2020
Loans - amortised cost and FVOCI
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL provisions (1)
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL provisions coverage (2,3)
Stage 1 (%)
Stage 2 (%)
Stage 3 (%)
Impairment losses
ECL charge (4)
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL loss rate - annualised (basis points) (3)
Amounts written-off
Of which: individual
Of which: collective
Retail
Banking
£m
Ulster Bank
RoI
£m
Commercial
Banking
£m
139,956
32,414
1,891
—
1,891
174,261
134
897
806
—
806
1,837
0.10
2.77
42.62
1.05
792
(36)
619
209
—
209
45
378
—
378
14,380
3,302
1,236
43
1,193
18,918
45
265
492
13
479
802
0.31
8.03
39.81
4.24
250
(68)
261
57
(12)
69
132
219
—
219
70,685
37,344
2,551
1,578
973
110,580
270
1,713
1,069
607
462
3,052
0.38
4.59
41.91
2.76
1,927
(58)
1,667
318
166
152
174
321
172
149
For the notes to this table refer to the following page.
NatWest Group Annual Report and Accounts 2020
181
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Portfolio summary – segment analysis
2019*
Loans - amortised cost and FVOCI
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL provisions (1)
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL provisions coverage (2,3)
Stage 1 (%)
Stage 2 (%)
Stage 3 (%)
Impairment losses
ECL charge (4)
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL loss rate - annualised (basis points) (3)
Amounts written-off
Of which: individual
Of which: collective
Retail
Banking
£m
Ulster Bank
RoI
£m
Commercial
Banking
£m
Private
Banking
£m
RBS
International
£m
NatWest
Markets
£m
Central items
& other
£m
144,513
13,558
1,902
—
1,902
159,973
114
467
823
—
823
1,404
0.08
3.44
43.27
0.88
393
(90)
256
227
—
227
25
235
—
235
15,409
1,642
2,037
68
1,969
19,088
29
53
693
22
671
775
0.19
3.23
34.02
4.06
(34)
(37)
(35)
38
—
38
(15)
85
5
80
88,100
11,353
2,162
1,497
665
101,615
14,956
587
207
207
—
15,750
14,834
545
121
121
—
15,500
152
214
1,021
602
419
1,387
0.17
1.88
47.22
1.36
391
(66)
99
358
328
30
38
450
345
105
7
7
29
29
—
43
4
6
21
21
—
31
0.05
1.19
14.01
0.27
0.03
1.10
17.36
0.20
(6)
(14)
—
8
8
—
(4)
1
1
—
2
(5)
5
2
2
—
1
5
5
—
9,273
180
169
158
11
9,622
10
5
131
122
9
146
0.11
2.78
77.51
1.52
(51)
—
(8)
(43)
(35)
(8)
(53)
16
16
—
15,282
3
—
—
—
15,285
6
—
—
—
—
6
0.04
—
—
0.04
1
—
1
—
—
—
1
—
—
—
Total
£m
302,367
27,868
6,598
2,051
4,547
336,833
322
752
2,718
796
1,922
3,792
0.11
2.70
41.19
1.13
696
(212)
318
590
303
287
20
792
372
420
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
Includes £6 million (2019 – £4 million) related to assets classified as FVOCI.
Notes:
(1)
(2) ECL provisions coverage is calculated as ECL provisions divided by loans – amortised cost and FVOCI.
(3) ECL provisions coverage and ECL loss rates are calculated on third party loans and related ECL provisions and charge respectively. ECL loss rate is calculated
(4)
as annualised third party ECL charge divided by loans – amortised cost and FVOCI.
Includes a £12 million charge (2019 – £2 million) related to other financial assets, of which £2 million (2019 – £1 million release) related to assets classified as
FVOCI; and £28 million (2019 – nil) related to contingent liabilities.
(5) The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to the Financial instruments within the scope
of the IFRS 9 ECL framework section for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central
banks totalling £122.7 billion (2019 – £79.2 billion) and debt securities of £53.8 billion (2019 – £59.4 billion).
Key points
The ECL requirement increased significantly year-on-year,
primarily in Stage 1 and Stage 2, in expectation of credit
deterioration reflecting the severity of the economic impact arising
from COVID-19. The deteriorated economic outlook also resulted in
a significant migration of exposures from Stage 1 to Stage 2,
consequently moving from a 12 month to a life-time ECL
requirement.
The various customer support mechanisms continued to mitigate
against flows to default during the year. Hence, there was a more
limited impact on Stage 3 ECL requirements which reduced slightly
year-on-year reflecting the lower Stage 3 stock of exposures,
driven by the sale of legacy non-performing mortgages in Ulster
Bank RoI.
Reflecting the continued high level of uncertainty arising from
COVID-19, management judged that certain ECL post model
adjustments were necessary. Refer to the Governance and post
model adjustments section for further detail.
Reflective of the economic environment, the annualised loss rate
was elevated and significantly above the previously advised view of
NatWest Group’s normalised blended long-term loss rate of 30 to
40 basis points.
Business level commentary is provided in the Segmental loans and
impairment metrics section.
NatWest Group Annual Report and Accounts 2020
182
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Segmental loans and impairment metrics
The table below shows gross loans and ECL provisions, by days past due, by segment and stage, within the scope of the ECL framework.
Gross loans
Stage 2 (1)
Not past
Stage 1
£m
14,380
11,117
3,263
due 1-30 DPD >30 DPD
£m
£m
£m
1,080
139,956 30,714
144
2,964
115
1,500
29
1,464
589
70,685 36,451
17
1,908
15,321
14
17
116
12,799
11
—
1,792
2,522
3
46
2,176
12,143
20
17
18
2,676
14
6
29
2,158
9,467
— 109
1,457
7,780
—
—
110
26,859
1,876
287,124 75,780
£m
620 32,414
3,302
194
1,745
130
1,557
64
304 37,344
1,939
144
1,795
2,242
49
2,193
1,566
110
1,261 78,917
Total Stage 3
£m
1,891
1,236
1,064
172
2,551
298
263
35
211
70
141
171
—
6,358
ECL provisions (2)
Stage 2 (1)
Not past
Total Stage 1
£m
134
45
27
18
270
31
7
24
14
3
11
12
13
519
£m
174,261
18,918
13,926
4,992
110,580
17,558
13,206
4,352
14,596
2,795
11,801
9,517
26,969
372,399
due 1-30 DPD >30 DPD
£m
£m
£m
65
70
762
23
15
227
13
9
74
10
6
153
21
44
1,648
1
—
67
—
—
2
1
—
65
1
1
72
—
—
1
1
1
71
—
—
49
—
—
15
111
130
2,840
Total Stage 3
£m
£m
897
265
96
169
Total
£m
806 1,837
802
492
515
392
287
100
1,713 1,069 3,052
138
28
110
136
15
121
193
28
3,081 2,586 6,186
39
19
20
48
11
37
132
—
68
2
66
74
1
73
49
15
166,548 32,348
120,576 43,432
1,229
647
775 34,352
486 44,565
3,288
3,070
204,188
168,211
171
348
839
2,001
79
51
78
33
996 1,228 2,395
2,085 1,358 3,791
15,409
10,858
4,551
144,513 11,921
1,405
944
461
88,100 10,837
478
14,956
180
11,630
298
3,326
520
14,834
27
2,799
493
12,035
176
9,273
3
15,282
302,367 25,340
169,800 13,072
132,567 12,268
1,034
104
96
8
254
63
60
3
18
17
1
4
—
1,477
1,207
270
603 13,558
1,642
133
1,145
105
497
28
262 11,353
587
46
281
41
306
5
545
7
50
6
1
495
— 180
3
—
1,051 27,868
1,902 159,973
19,088
2,037
13,880
1,877
5,208
160
2,162 101,615
15,750
12,103
3,647
15,500
2,914
12,586
9,622
— 15,285
6,598 336,833
207
192
15
121
65
56
169
755 15,034
296 12,834
4,036 188,870
2,562 147,963
114
29
12
17
152
7
3
4
4
1
3
10
6
322
130
192
375
39
20
19
195
6
2
4
6
1
5
5
—
626
398
228
45
6
6
—
12
—
—
—
—
—
—
—
—
63
51
12
47
8
6
2
7
1
1
—
—
—
—
—
—
63
54
9
467
53
32
21
823 1,404
775
693
635
591
140
102
214 1,021 1,387
43
29
29
23
14
6
31
21
14
12
17
9
146
131
6
—
752 2,718 3,792
7
3
4
6
1
5
5
—
503 1,449 2,082
249 1,269 1,710
2020
Retail Banking
Ulster Bank RoI
Personal
Wholesale
Commercial Banking
Private Banking
Personal
Wholesale
RBS International
Personal
Wholesale
NatWest Markets
Central items & other
Total loans
Of which:
Personal
Wholesale
2019*
Retail Banking
Ulster Bank RoI
Personal
Wholesale
Commercial Banking
Private Banking
Personal
Wholesale
RBS International
Personal
Wholesale
NatWest Markets
Central items & other
Total loans
Of which:
Personal
Wholesale
i
R
s
k
a
n
d
c
a
p
i
t
a
l
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
For the notes to this table refer to the following page.
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
183
Risk and capital management
Credit risk – Banking activities continued
Segmental loans and impairment metrics
The table below shows ECL and ECL provisions coverage, by days past due, by segment and stage, within the scope of the ECL framework.
ECL provisions coverage
Stage 2 (1,2)
ECL
2020
Retail Banking
Ulster Bank RoI
Personal
Wholesale
Commercial Banking
Private Banking
Personal
Wholesale
RBS International
Personal
Wholesale
NatWest Markets
Central items & other
Total loans
Of which:
Personal
Wholesale
2019*
Retail Banking
Ulster Bank RoI
Personal
Wholesale
Commercial Banking
Private Banking
Personal
Wholesale
RBS International
Personal
Wholesale
NatWest Markets
Central items & other
Total loans
Of which:
Personal
Wholesale
Stage 1
%
0.10
0.31
0.24
0.55
0.38
0.20
0.05
0.95
0.12
0.11
0.12
0.15
0.05
0.18
0.10
0.29
0.08
0.19
0.11
0.37
0.17
0.05
0.03
0.12
0.03
0.04
0.02
0.11
0.04
0.11
0.08
0.14
Not past
due
%
2.48
7.66
4.93
10.45
4.52
3.51
1.72
3.63
3.31
5.56
3.29
3.36
13.64
3.75
1-30 DPD
%
6.48
10.42
7.83
20.69
7.47
—
—
—
2.17
—
3.45
—
—
6.93
2.59
4.61
3.15
2.78
2.12
4.12
1.80
1.26
1.11
1.34
1.15
3.70
1.01
2.84
—
2.47
3.04
1.86
6.43
7.88
4.35
5.77
6.25
—
4.72
—
—
—
—
—
—
—
—
4.27
4.23
4.44
>30 DPD
%
10.48
11.86
10.00
15.63
6.91
7.14
—
33.33
5.00
—
16.67
—
—
8.80
10.06
6.79
7.79
6.02
5.71
7.14
2.67
2.17
2.44
—
—
—
—
—
—
5.99
7.15
3.04
Total
%
2.77
8.03
5.50
10.85
4.59
3.51
1.39
3.68
3.30
2.04
3.33
3.13
13.64
3.90
2.90
4.68
3.44
3.23
2.79
4.23
1.88
1.19
1.07
1.31
1.10
2.00
1.01
2.78
—
2.70
3.35
1.94
Stage 3
%
42.62
39.81
36.84
58.14
41.91
13.09
7.22
57.14
22.75
15.71
26.24
77.19
—
40.67
37.35
44.23
43.27
34.02
31.49
63.75
47.22
14.01
11.98
40.00
17.36
18.46
16.07
77.51
—
41.19
35.90
49.53
Total
%
1.05
4.24
3.70
5.75
2.76
0.79
0.21
2.53
0.93
0.54
1.03
2.03
0.10
1.66
1.17
2.25
0.88
4.06
4.57
2.69
1.36
0.27
0.24
0.38
0.20
0.48
0.14
1.52
0.04
1.13
1.10
1.16
Total
charge
Amounts
Loss rate written-off
£m
378
219
212
7
321
5
1
4
3
3
—
11
—
937
£m basis points
45
132
76
288
174
57
(4)
241
73
14
87
42
10
87
792
250
106
144
1,927
100
(5)
105
107
4
103
40
26
3,242
897
2,345
393
(34)
(16)
(18)
391
(6)
5
(11)
2
—
2
(51)
1
696
382
314
44
139
25
(15)
(12)
(22)
38
(4)
4
(30)
1
—
2
(53)
1
20
20
21
594
343
235
85
69
16
450
1
1
—
5
5
—
16
—
792
310
482
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
a
g
e
m
e
n
t
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
Notes:
(1) 30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by the IFRS 9 guidance for a SICR.
(2) ECL provisions on contingent liabilities and commitments are included within the Financial assets section so as not to distort ECL coverage ratios.
Key points
Retail Banking – Balance sheet growth was primarily due to
mortgages. This reflected strong customer demand as well as the
£3.0 billion acquisition of an owner-occupied mortgage portfolio
from Metro Bank (for which a Stage 1 ECL charge of £9 million was
incurred on acquisition).
Unsecured lending balances decreased reflecting reduced
customer demand and the pay down of existing borrowing as well
as a more restrictive risk appetite reflective of the uncertain
external environment. The deteriorated economic outlook, including
forecast increases in unemployment, resulted in increased account
level IFRS 9 PDs. Consequently, compared to 2019, a larger
proportion of customer accounts exhibited a significant increase in
credit risk (SICR) which caused a migration of assets from Stage 1
to Stage 2. As a result, the ECL requirement increased.
While the granting of a COVID-19 related payment holiday did not
automatically trigger a migration to Stage 2, a subset of customers
who had accessed payment holiday support, and where their risk
profile was identified as relatively high risk, were collectively
migrated to Stage 2 and their ECL uplifted (refer to the Governance
and post model adjustments section for further details). The various
COVID-19 related customer support mechanisms (loan repayment
holidays, government job retention scheme) continued to mask
actual portfolio deterioration in the short-term, with the days past
due, and flows to Stage 3 metrics, yet to be impacted. Provisions
coverage increased overall. However, coverage in Stage 2 alone
reduced, mainly due to a proportionately higher share of mortgage
exposures where coverage levels were lower. This reflected the
secured nature of the borrowing. The loss rate was significantly
higher than in the prior year.
NatWest Group Annual Report and Accounts 2020
184
Risk and capital management
Credit risk – Banking activities continued
Ulster Bank RoI – Balances remained broadly flat year-on-year.
Further drawdowns on existing facilities and new lending across
both the Wholesale and Personal portfolios were offset by ongoing
reduction of the non-performing mortgage portfolio through the
execution of a portfolio sale agreed in 2019. The deteriorated
economic outlook included forecast increases in unemployment,
reductions in property prices and GDP, which resulted in increased
IFRS 9 PDs across all portfolios. Consequently, compared to 2019,
a larger proportion of the exposures exhibited a SICR with an
associated migration of assets from Stage 1 to Stage 2. As a result,
the ECL increased. The various COVID-19 related customer
support mechanisms (for example, loan payment breaks,
government job retention scheme) masked actual portfolio
deterioration in the short-term, with the days past due, and flows to
Stage 3, yet to be materially affected. The loss rate was
significantly higher than in the prior year.
Commercial Banking – Balance sheet growth was primarily due to
further drawdowns on existing facilities and new lending under the
COVID-19 government lending schemes. The deteriorated
economic outlook, including significant reductions in GDP and
commercial real estate valuations, resulted in increased IFRS 9
PDs. Consequently, compared to 2019, a larger proportion of the
exposures exhibited a SICR which caused a migration of assets
from Stage 1 to Stage 2. As a result, the ECL requirement
increased. Reflecting the continued high level of uncertainty arising
from COVID-19, management judged that certain ECL post model
adjustments were necessary, refer to the Governance and post
model adjustments section for further details. The increase in
Stage 2 assets due to PD deterioration was also the primary driver
of the increase in the Stage 2 exposures less than 30 days past
due. A small number of large cases resulted in the increase in the
1-30 DPD category. The various COVID-19 related customer
support mechanisms mitigated against flows into default in the
short-term. Increased coverage in Stage 1 and Stage 2 was mainly
due to the increased ECL, primarily as a result of the deteriorated
economic outlook, which was partially offset by a decrease in
Stage 3 coverage driven by a small number of individual cases with
low ECL. The loss rate was significantly higher than in the prior
year.
Other businesses – The drivers of the increased ECL requirement
were similar to those described above.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
185
Risk and capital management
Credit risk – Banking activities continued
Portfolio summary – sector analysis
The table below shows financial assets and off-balance sheet exposures gross of ECL and related ECL provisions, impairment and past due by
sector, asset quality and geographical region.
2020
Loans by geography
- UK
- RoI
- Other Europe
- RoW
Loans by asset quality (2)
- AQ1
- AQ2
- AQ3
- AQ4
- AQ5
- AQ6
- AQ7
- AQ8
- AQ9
- AQ10
Loans by stage
- Stage 1
- Stage 2
- Stage 3
- Of which: individual
- Of which: collective
Loans - past due analysis (3,4)
- Not past due
- Past due 1-30 days
- Past due 31-89 days
- Past due 90-180 days
- Past due >180 days
Loans - Stage 2
- Not past due
- Past due 1-30 days
- Past due 31-89 days
Weighted average life**
- ECL measurement (years)
Weighted average 12 months PDs**
- IFRS 9 (%)
- Basel (%)
ECL provisions by geography
- UK
- RoI
- Other Europe
- RoW
ECL provisions by stage
- Stage 1
- Stage 2
- Stage 3
- Of which: individual
- Of which: collective
ECL provisions coverage (%)
- Stage 1 (%)
- Stage 2 (%)
- Stage 3 (%)
ECL charge
- UK
- RoI
- Other Europe
- RoW
ECL loss rate (%)
Amounts written-off
**Not within audit scope.
Corporate
£m
FI Sovereign
£m
Mortgages (1)
£m
190,516
176,866
13,650
—
—
190,516
3,053
6,263
279
114,932
48,429
3,642
8,333
1,434
1,593
2,558
190,516
158,387
29,571
2,558
308
2,250
190,516
186,592
1,482
863
456
1,123
29,571
27,893
1,038
640
Personal
Credit
cards
£m
3,895
3,816
79
—
—
3,895
—
—
—
27
997
1,092
1,375
249
46
109
3,895
2,411
1,375
109
—
109
3,895
3,770
29
26
20
50
1,375
1,340
18
17
Other
personal
£m
650
—
—
197
—
—
1,472
3,713
1,567
729
382
621
Total
£m
9,777 204,188
9,580 190,262
13,926
—
—
9,777 204,188
3,703
6,263
279
643 115,602
50,898
8,447
11,275
2,412
2,021
3,288
9,777 204,188
5,750 166,548
34,352
3,406
3,288
621
334
26
2,954
595
9,777 204,188
8,868 199,230
1,703
1,024
542
1,689
34,352
32,348
1,229
775
192
135
66
516
3,406
3,115
173
118
Property
£m
38,076
35,617
1,241
772
446
38,076
1,856
3,134
3,547
6,236
8,917
6,939
3,680
2,029
416
1,322
38,076
23,733
13,021
1,322
987
335
38,076
36,818
348
260
161
489
13,021
12,708
160
153
Wholesale
1,195
4,056
4,132
3,377
5,503
13,376
19,407
14,494
12,896
7,038
1,488
1,727
£m
77,533 47,643
65,968 34,847
348
4,535
7,913
77,533 47,643
7,325
409 26,953
1,824
8,105
1,857
711
563
98
190
17
77,533 47,643
48,090 44,002
3,624
27,716
17
1,727
9
958
8
769
77,533 47,643
75,690 47,195
328
113
—
7
3,624
3,484
30
110
990
251
67
535
27,716
27,036
457
223
30
538
615
Total
£m
4,959 168,211
3,776 140,208
5,675
9,977
12,351
4,959 168,211
12,798
2,422
31,362
866
12,160
1,286
27,980
263
30,183
2
22,243
99
17,142
3
9,176
11
2,097
3
3,070
4
4,959 168,211
4,751 120,576
44,565
3,070
1,958
1,112
4,959 168,211
4,689 164,392
1,936
624
228
1,031
44,565
43,432
647
486
270
—
—
—
204
204
—
—
204
4
4
—
Total
£m
372,399
330,470
19,601
9,977
12,351
372,399
16,501
37,625
12,439
143,582
81,081
30,690
28,417
11,588
4,118
6,358
372,399
287,124
78,917
6,358
2,292
4,066
372,399
363,622
3,639
1,648
770
2,720
78,917
75,780
1,876
1,261
9
2
5
6
4
6
4
—
5
5
0.72
0.85
1,005
506
499
—
—
1,005
51
319
635
18
617
0.53
0.03
1.08
24.82
284
181
103
—
—
0.15
221
6.17
3.40
354
351
3
—
—
354
53
225
76
—
76
9.09
2.20
16.36
69.72
191
190
1
—
—
4.90
95
4.82
3.82
1,036
1,024
12
—
—
1,036
67
452
517
12
505
10.60
1.17
13.27
83.25
422
420
2
—
—
4.32
278
1.03
1.03
2,395
1,881
514
—
—
2,395
171
996
1,228
30
1,198
1.17
0.10
2.90
37.35
897
791
106
—
—
0.44
594
3.99
1.66
1,175
1,069
41
53
12
1,175
123
507
545
360
185
3.09
0.52
3.89
41.23
741
703
7
21
10
1.95
54
3.70
2.51
2,478
1,907
277
125
169
2,478
188
1,487
803
436
367
3.20
0.39
5.37
46.50
1,502
1,276
149
34
43
1.94
287
0.51
0.32
121
60
3
46
12
121
23
90
8
3
5
0.25
0.05
2.48
47.06
95
48
—
38
9
0.20
2
0.13
0.15
17
12
1
1
3
17
14
1
2
2
—
0.34
0.29
0.49
50.00
7
6
—
—
1
0.14
—
2.73
1.54
3,791
3,048
322
225
196
3,791
348
2,085
1,358
801
557
2.25
0.29
4.68
44.23
2,345
2,033
156
93
63
1.39
343
1.81
1.25
6,186
4,929
836
225
196
6,186
519
3,081
2,586
831
1,755
1.66
0.18
3.90
40.67
3,242
2,824
262
93
63
0.87
937
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
For the notes to this table refer to page 189.
NatWest Group Annual Report and Accounts 2020
186
Risk and capital management
Credit risk – Banking activities continued
Portfolio summary – sector analysis
Personal
Wholesale
2020
Loans by residual maturity
- <1 year
- 1-5 year
- 5 year
Other financial assets by asset quality (2)
- AQ1-AQ4
- AQ5-AQ8
Off-balance sheet
- Loan commitments
- Financial guarantees
Off-balance sheet by asset quality (2)
- AQ1-AQ4
- AQ5-AQ8
- AQ9
- AQ10
For the notes to this table refer to page 189.
Credit
Other
cards personal
£m
£m
3,895
2,557
1,338
Mortgages (1)
£m
190,516
3,831
12,193
174,492
—
—
—
Total
£m
9,777 204,188
9,637
3,249
19,040
5,509
— 1,019 175,511
—
—
—
—
—
—
—
—
—
39,005
14,557 14,262 10,186
38,960
14,554 14,262 10,144
45
42
39,005
14,557 14,262 10,186
21,766
8,008
13,610
16,898
2,152
18
9
323
17
148
937 13,809
8
297
1
9
—
3
£m
FI Sovereign
£m
PropertyCorporate
£m
20,029 36,640
9,378 17,878
£m
38,076 77,533 47,643
8,669 23,015 38,203
8,340
1,100
Total
£m
4,959 168,211
72,083
2,196
66,599
1,590
29,529
1,173
98
116 11,093 165,209 176,516
— 116 10,734 165,184 176,034
482
98
94,630
89,845
4,785
94,630
63,720
30,164
90
656
359
17,397 58,635 17,011
16,829 55,496 15,935
1,076
3,139
17,397 58,635 17,011
12,917 33,939 15,460
1,544
1
6
25
1,587
1,585
2
1,587
1,404
183
—
—
4,372 24,065
76
555
13
95
568
—
Total
£m
372,399
81,720
85,639
205,040
176,516
176,034
482
133,635
128,805
4,830
133,635
85,486
47,062
108
979
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
187
Risk and capital management
Credit risk – Banking activities continued
Portfolio summary – sector analysis
2019*
Loans by geography
- UK
- RoI
- Other Europe
- RoW
Loans by asset quality (2)
-AQ1
-AQ2
-AQ3
-AQ4
-AQ5
-AQ6
-AQ7
-AQ8
- AQ9
- AQ10
Loans by stage
- Stage 1
- Stage 2
- Stage 3
- of which: individual
- of which: collective
Loans - past due analysis (3,4)
- Not past due
- Past due 1-30 days
- Past due 31-89 days
- Past due 90-180 days
- Past due >180 days
Loans - Stage 2
- Not past due
- Past due 1-30 days
- Past due 31-89 days
Weighted average life**
- ECL measurement (years)
Weighted average 12 months PDs**
- IFRS 9 (%)
- Basel (%)
ECL provisions by geography
- UK
- RoI
- Other Europe
- RoW
ECL provisions by stage
- Stage 1
- Stage 2
- Stage 3
- of which: individual
- of which: collective
ECL provisions coverage (%)
- Stage 1 (%)
- Stage 2 (%)
- Stage 3 (%)
ECL charge
- UK
- RoI
- Other Europe
- RoW
ECL loss rate (%)
Amounts written-off
Mortgages (1)
£m
174,003
160,431
13,572
—
—
174,003
3,837
2,866
277
92,520
58,051
5,253
5,326
1,379
1,217
3,277
174,003
159,261
11,465
3,277
235
3,042
174,003
169,536
1,578
955
495
1,439
11,465
9,798
1,050
617
Personal
Credit
cards
£m
95
—
—
—
—
—
375
786
1,211
1,531
393
66
116
Other
Total
personal
£m
£m
4,478 10,389 188,870
4,383 10,176 174,990
13,880
213
—
—
—
—
4,478 10,389 188,870
4,502
665
2,866
—
—
277
93,520
625
60,545
1,708
9,808
3,344
9,185
2,328
2,564
792
1,567
284
4,036
643
4,478 10,389 188,870
7,436 169,800
3,103
15,034
2,310
1,259
4,036
643
116
21
—
256
3,780
622
116
4,478 10,389 188,870
9,473 183,322
4,313
1,785
43
1,114
36
30
609
2,040
56
15,034
1,259
13,072
1,204
1,207
29
755
26
164
123
84
545
2,310
2,070
128
112
Wholesale
Corporate
£m
4,169
4,350
3,857
496
5,561
14,660
19,584
13,470
11,404
1,478
468
1,649
FI
£m
71,042 36,266
58,666 22,564
513
5,120
8,069
71,042 36,266
2,272 17,841
1,763
2,939
9,979
2,027
811
867
20
6
13
71,042 36,266
59,689 35,707
546
13
7
6
71,042 36,266
68,730 36,214
36
7
—
9
546
534
5
7
1,339
271
148
554
9,704
9,266
214
224
9,704
1,649
1,137
512
Property
£m
36,371
33,644
1,310
921
496
36,371
4,474
2,490
2,465
6,574
10,419
5,809
2,853
302
90
895
36,371
32,896
2,580
895
646
249
36,371
35,445
317
82
26
501
2,580
2,466
49
65
Sovereign
£m
32
328
445
Total
£m
4,284 147,963
3,479 118,353
6,024
10,719
12,867
4,284 147,963
26,518
1,931
6,529
1,780
11,350
385
31,254
41
32,137
107
20,093
3
15,154
30
1,802
2
564
—
2,562
5
4,284 147,963
4,275 132,567
12,834
2,562
1,795
767
4,284 147,963
4,230 144,619
1,746
360
174
1,064
12,834
12,270
268
296
54
—
—
—
4
4
—
—
4
5
5
—
Total
£m
336,833
293,343
19,904
10,719
12,867
336,833
31,020
9,395
11,627
124,774
92,682
29,901
24,339
4,366
2,131
6,598
336,833
302,367
27,868
6,598
2,051
4,547
336,833
327,941
3,531
1,474
783
3,104
27,868
25,342
1,475
1,051
9
2
6
5
6
6
3
1
6
6
0.31
0.81
964
342
622
—
—
964
25
118
821
24
797
0.55
0.02
1.03
25.05
25
28
(3)
—
—
0.01
78
3.86
3.59
261
259
2
—
—
261
40
132
89
—
89
5.83
1.29
10.48
76.72
104
105
(1)
—
—
2.32
76
2.98
3.75
857
846
11
—
—
857
65
253
539
11
528
8.25
0.87
10.95
83.83
253
261
(8)
—
—
2.44
156
0.54
1.03
2,082
1,447
635
—
—
2,082
130
503
1,449
35
1,414
1.10
0.08
3.35
35.90
382
394
(12)
—
—
0.20
310
0.63
0.96
494
424
39
28
3
494
45
47
402
236
166
1.36
0.14
1.82
44.92
33
64
(2)
(29)
—
0.09
250
0.98
1.25
1,181
800
117
130
134
1,181
124
198
859
521
338
1.66
0.21
2.04
52.09
283
230
(16)
117
(48)
0.40
219
0.13
0.20
28
14
3
9
2
28
16
4
8
4
4
0.08
0.04
0.73
61.54
(4)
(4)
1
—
(1)
(0.01)
13
0.05
0.07
7
4
1
1
1
7
7
—
—
—
—
0.09
0.09
—
—
2
2
—
—
—
0.05
—
0.60
0.83
1,710
1,242
160
168
140
1,710
192
249
1,269
761
508
1.13
0.14
1.94
49.53
314
292
(17)
88
(49)
0.21
482
0.56
0.94
3,792
2,689
795
168
140
3,792
322
752
2,718
796
1,922
1.12
0.11
2.70
41.19
696
686
(29)
88
(49)
0.21
792
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
**Not within audit scope.
For the notes to this table refer to the following page.
NatWest Group Annual Report and Accounts 2020
188
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Portfolio summary – sector analysis
Personal
Wholesale
2019*
Loans by residual maturity
- <1 year
- 1-5 year
- 5 year
Other financial assets by asset quality (2)
- AQ1-AQ4
- AQ5-AQ8
- AQ9
Off-balance sheet
- Loan commitments
- Financial guarantees
Off-balance sheet by asset quality (2)
- AQ1-AQ4
- AQ5-AQ8
- AQ9
- AQ10
£m
Mortgages
£m
174,003
3,996
8,771
161,236
—
—
—
—
Credit
Other
Total
cards personal
£m
£m
4,478 10,389 188,870
10,226
3,480
2,750
16,268
5,769
1,728
— 1,140 162,376
—
—
—
—
—
—
—
—
—
—
—
—
43,366
14,348 16,686 12,332
43,316
14,345 16,686 12,285
50
47
43,366
14,348 16,686 12,332
27,373
3,818 10,049
13,506
15,691
2,271
17
12
285
—
832 12,588
4
276
1
9
—
3
£m
Sovereign
£m
Property Corporate
£m
19,774 31,215
9,279 15,288
FI
£m
36,371 71,042 36,266
7,318 24,539 27,299
7,922
1,045
Total
£m
4,284 147,963
61,498
2,342
60,075
1,164
26,390
778
— 110 12,185 126,305 138,600
— 110 11,742 126,041 137,893
705
—
2
—
84,537
79,060
5,477
84,537
62,597
21,554
64
322
441
2
15,383 51,390 16,742
14,739 47,883 15,417
1,325
3,507
15,383 51,390 16,742
11,364 34,852 15,397
1,340
4
1
264
—
1,022
1,021
1
1,022
984
38
—
—
3,948 16,228
49
261
11
60
—
—
644
Total
£m
336,833
71,724
76,343
188,766
138,600
137,893
705
2
127,903
122,376
5,527
127,903
89,970
37,245
81
607
Notes:
(1)
Includes a portion of secured lending in Private Banking, in line with ECL calculation methodology. Private Banking and RBS International mortgages are
reported in UK, which includes crown dependencies, reflecting the country of lending origination.
(2) AQ bandings are based on Basel PDs and mapping is as follows:
Internal asset
quality band
AQ1
AQ2
AQ3
AQ4
AQ5
AQ6
AQ7
AQ8
AQ9
AQ10
Probability of
default range
0% - 0.034%
0.034% - 0.048%
0.048% - 0.095%
0.095% - 0.381%
0.381% - 1.076%
1.076% - 2.153%
2.153% - 6.089%
6.089% - 17.222%
17.222% - 100%
100%
Indicative
S&P rating
AAA to AA
AA to AA-
A+ to A
BBB+ to BBB-
BB+ to BB
BB- to B+
B+ to B
B- to CCC+
CCC to C
D
£0.3 billion (2019 – £0.3 billion) of AQ10 Personal balances primarily relate to loan commitments, the drawdown of which is effectively prohibited. AQ10 includes
£0.4 billion (2019 – £0.6 billion) of RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but are included in Stage
3.
(3) 30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by the IFRS 9 guidance for a SICR.
(4) Days past due – Personal products: at a high level, for amortising products, the number of days past due is derived from the arrears amount outstanding and
the monthly repayment instalment. For credit cards, it is based on payments missed, and for current accounts the number of continual days in excess of
borrowing limit. Wholesale products: the number of days past due for all products is the number of continual days in excess of borrowing limit.
NatWest Group Annual Report and Accounts 2020
189
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Sector analysis
The table below shows ECL by stage, for the Personal portfolios and key sectors of the Wholesale portfolios, that continue to be affected by
COVID-19.
2020
Personal
Mortgages
Credit cards
Other personal
Wholesale
Property
Financial institutions
Sovereign
Corporate
Of which:
Airlines and aerospace
Automotive
Education
Health
Land transport and logistics
Leisure
Oil and gas
Retail
Total
2019*
Personal
Mortgages
Credit cards
Other personal
Wholesale
Property
Financial institutions
Sovereign
Corporate
Of which:
Airlines and aerospace (2)
Automotive
Education
Health
Land transport and logistics
Leisure
Oil and gas
Retail
Total
Loans - amortised cost
and FVOCI
Stage 2
£m
34,352
29,571
1,375
3,406
44,565
13,021
3,624
204
27,716
1,213
1,759
754
2,984
1,823
6,135
300
2,282
78,917
15,034
11,465
1,259
2,310
12,834
2,580
546
4
9,704
261
1,143
154
844
316
1,253
140
1,279
27,868
Stage 3
£m
3,288
2,558
109
621
3,070
1,322
17
4
1,727
41
161
63
131
111
385
83
187
6,358
4,036
3,277
116
643
2,562
895
13
5
1,649
40
20
12
167
53
377
86
215
6,598
Total
£m
204,188
190,516
3,895
9,777
168,211
38,076
47,643
4,959
77,533
2,007
6,303
1,638
5,809
4,802
9,819
1,561
9,171
372,399
188,870
174,003
4,478
10,389
147,963
36,371
36,266
4,284
71,042
1,713
6,225
1,592
5,706
3,846
7,953
2,149
7,891
336,833
Stage 1
£m
166,548
158,387
2,411
5,750
120,576
23,733
44,002
4,751
48,090
753
4,383
821
2,694
2,868
3,299
1,178
6,702
287,124
169,800
159,261
3,103
7,436
132,567
32,896
35,707
4,275
59,689
1,412
5,062
1,426
4,695
3,477
6,323
1,923
6,397
302,367
Off-balance sheet
Loan
commitments (1)
£m
38,960
14,554
14,262
10,144
89,845
16,829
15,935
1,585
55,496
Contingent
liabilities
£m
45
3
—
42
4,785
568
1,076
2
3,139
Stage 1
£m
171
51
53
67
348
123
23
14
188
ECL provisions
Stage 2
£m
996
319
225
452
2,085
507
90
1
1,487
Stage 3
£m
1,228
635
76
517
1,358
545
8
2
803
1,888
4,205
1,016
616
3,782
2,199
2,225
5,888
128,805
43,316
14,345
16,686
12,285
79,060
14,739
15,417
1,021
47,883
1,716
3,815
654
534
3,301
2,876
2,400
5,383
122,376
215
102
16
14
197
125
346
512
4,830
50
3
—
47
5,477
644
1,325
1
3,507
271
98
18
17
249
135
358
560
5,527
2
17
2
13
8
22
4
18
519
130
25
40
65
192
45
16
7
124
2
12
2
9
6
25
5
13
322
42
63
41
164
98
439
20
112
3,081
503
118
132
253
249
47
4
—
198
3
11
4
16
12
27
3
16
752
25
17
17
48
32
204
59
101
2,586
1,449
821
89
539
1,269
402
8
—
859
55
15
1
52
21
175
55
180
2,718
Total
£m
2,395
1,005
354
1,036
3,791
1,175
121
17
2,478
69
97
60
225
138
665
83
231
6,186
2,082
964
261
857
1,710
494
28
7
1,181
60
38
7
77
39
227
63
209
3,792
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
Notes:
(1) Includes £3.7 billion of commercial cards related balances which were brought into the scope of ECL calculations during 2020.
(2) Airlines and aerospace Stage 3 ECL at 31 December 2019 included £27 million of ECL related to contingent liabilities.
Wholesale forbearance
The table below shows Wholesale forbearance, Heightened Monitoring and Risk of Credit Loss by sector. Personal forbearance is disclosed in
the Personal portfolio section.
2020
Forbearance (flow)
Forbearance (stock)
Heightened Monitoring and Risk of Credit Loss
2019
Forbearance (flow)
Forbearance (stock)
Heightened Monitoring and Risk of Credit Loss
Property
£m
1,597
1,744
1,600
546
675
1,209
FI
£m
68
92
155
35
35
107
Other corporate
£m
4,201
4,983
5,771
2,254
3,223
4,207
Total
£m
5,866
6,819
7,526
2,835
3,933
5,523
NatWest Group Annual Report and Accounts 2020
190
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Portfolio summary – sector analysis
Key points
Loans by geography – In the Personal portfolio, exposures
continued to be concentrated in the UK and heavily weighted to
mortgages; the vast majority of exposures in the Republic of
Ireland remained in mortgages. Balance sheet growth was within
mortgages including the acquisition by Retail Banking of the owner-
occupied portfolio detailed earlier; unsecured lending balances
reduced also as described earlier. In the Wholesale portfolio,
exposures remained heavily weighted to the UK. Balance sheet
growth was driven by additional drawings on existing facilities and
new lending under the various government supported lending
schemes which are primarily to UK customers.
Loans by asset quality (based on Basel II PD) – In the Personal
portfolio, the asset quality distribution deteriorated slightly in credit
cards, with balance reductions in higher asset quality bands. In the
Wholesale portfolio, Basel II PDs were based on a through-the-
cycle approach. The asset quality distribution demonstrated some
deterioration across the portfolio consistent with the wider impacts
of COVID-19. Lending under government-backed COVID-19
related support schemes was mostly in the AQ8 band. Increased
exposure in the AQ2 band in financial institutions is related to
Treasury activities as customer deposit levels have increased. In
addition, some AQ migration within financial institutions occurred
as a result of the downgrade of the UK sovereign. For further
details refer to the Asset quality section.
Loans by stage – In both the Personal and Wholesale portfolios,
the deteriorated economic outlook resulted in increased account
level IFRS 9 PDs. Consequently, compared to 2019, a larger
proportion of accounts exhibited a SICR with an associated
migration of exposures from Stage 1 to Stage 2, the vast majority
of which were up-to-date with payments. In the absence of any
other forbearance or SICR triggers, customers granted COVID-19
related payment holidays were not considered forborne and did not
result in an automatic trigger to Stage 2. However, a subset of
personal customers who had accessed payment holiday support,
and where their risk profile was identified as relatively high risk,
were collectively migrated to Stage 2.
Loans – Past due analysis and Stage 2 – The various COVID-19
related customer support mechanisms (capital repayment holidays,
government job retention scheme, government supported lending
schemes) are mitigating actual portfolio deterioration in the short
term, although there have been some increases in past due
exposures in the Wholesale portfolio.
Weighted average 12 months PDs – In Personal, the Basel II point-
in-time PDs have yet to be materially affected by COVID-19. The
forward-looking IFRS 9 PDs increased reflecting the deteriorated
economics. The IFRS 9 PDs for both unsecured loans (reported
within other personal) and mortgages were under-predicting and
the ECL was adjusted upwards pending the model parameters
being systematically updated. In the Wholesale portfolio, the Basel
II PDs were based on a through-the-cycle approach and increased
less than the forward looking IFRS 9 PDs which increased,
reflecting the deteriorated economic outlook.
ECL provision by geography – In line with loans by geography, the
vast majority of ECL related to exposures in the UK and the
Republic of Ireland.
ECL provisions by stage – Stage 1 and Stage 2 provisions
increased reflecting the deteriorated economic outlook. As outlined
above, Stage 3 provisions have yet to be materially impacted by
COVID-19, being mitigated by the various customer support
mechanisms detailed earlier. In mortgages, the Stage 3 ECL
reduction was primarily a result of a debt sale in Ulster Bank RoI,
where the exposure value also reduced.
ECL provisions coverage – Overall provisions coverage increased.
In Stage 2 alone, at a total Personal level, coverage reduced, due
to a proportionately higher share of mortgage exposures where
coverage levels were lower reflecting the secured nature of the
borrowing. In Wholesale, overall provisions coverage increased,
primarily due to the effect of the deteriorated economic conditions.
Stage 1 and Stage 2 coverage increased, particularly in those
sectors suffering the most disruption as a result of COVID-19. The
decrease in Stage 3 coverage was due to a small number of
individual cases with low ECL.
The ECL charge and loss rate – Reflecting the deteriorated
economic outlook, the impairment charge was elevated, with the
loss rate significantly higher than the prior year.
Loans by residual maturity – In mortgages, the vast majority of
exposures remained greater than five years. In unsecured lending
– credit cards and other – exposures were concentrated in less
than five years. In Wholesale, with the exception of financial
institutions where new lending was concentrated in less than 1
year, the majority of new lending was for residual maturity of one-
five years, with some greater than five years in line with lending
under the government support schemes.
Other financial assets by asset quality – Consisting almost entirely
of cash and balances at central banks and debt securities, held in
the course of treasury related management activities, these assets
were mainly within the AQ1-AQ4 category.
Off-balance sheet exposures by asset quality – In Personal,
undrawn exposures were reflective of available credit lines in credit
cards and current accounts and reduced reflecting an initiative to
right-size customer unutilised borrowing limits. Additionally, the
mortgage portfolio had undrawn exposure, where a formal offer
had been made to a customer but had not yet been drawn down.
There was also a legacy portfolio of flexible mortgages where a
customer had the right and ability to draw down further funds. The
asset quality distribution in mortgages remained heavily weighted
to the highest quality bands AQ1-AQ4, with credit card
concentrated in the risk bands AQ5-AQ8. In Wholesale, undrawn
exposures increased reflecting the effect of COVID-19 and the
utilisation of the various government support schemes. The vast
majority of new corporate loan commitments were in the AQ5-AQ8
asset quality bands.
Wholesale forbearance – The value of Wholesale forbearance
increased significantly during the year. Customers seeking COVID-
19 related support, including payment holidays, who were not
subject to any wider SICR triggers and who were assessed as
having the ability in the medium term post-COVID-19 to be viable
and meet credit appetite metrics, were not considered to have been
granted forbearance. The leisure, CRE and automotive sectors
represented the largest share of forbearance flow in the Wholesale
portfolio by value, with the increase in automotive resulting from
forbearance completed on individually significant exposures. In
addition, within the retail sector, there was a high volume of lower
value forbearance. Payment holidays and covenant waivers were
the most common forms of forbearance granted.
Heightened Monitoring and Risk of Credit Loss – Consistent with
the effects of COVID-19, increased flows into Heightened
Monitoring and Risk of Credit Loss were noted across a number of
sectors. The most material increases in both volumes and value
were seen within other corporate and particularly in leisure, land
transport & logistics and automotive sectors. In the CRE sector,
inflows by value increased, but by volume remained largely stable.
NatWest Group Annual Report and Accounts 2020
191
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Credit risk enhancement and mitigation
The table below shows exposures of modelled portfolios within the scope of the ECL framework and related credit risk enhancement and
mitigation (CREM).
2020
Financial assets
Cash and balances at central banks
Loans - amortised cost (3)
Personal (4)
Wholesale (5)
Debt securities
Total financial assets
Contingent liabilities and commitments
Personal (6,7)
Wholesale
Total off-balance sheet
Total exposure
2019*
Financial assets
Cash and balances at central banks
Loans - amortised cost (3)
Personal (4)
Wholesale (5)
Debt securities
Total financial assets
Contingent liabilities and commitments
Personal (6,7)
Wholesale
Total off-balance sheet
Total exposure
Gross
exposure
£bn
122.7
372.4
204.2
168.2
53.8
548.9
39.0
94.6
133.6
682.5
79.2
336.9
188.9
148.0
59.4
475.5
43.4
84.5
127.9
603.4
Maximum credit risk
CREM by type
CREM coverage
Exposure post
CREM
ECL
£bn
Total
£bn
— 122.7
366.4
6.0
201.8
2.4
164.6
3.6
53.8
—
542.9
6.0
—
0.2
0.2
6.2
—
3.8
2.1
1.7
—
3.8
39.0
94.4
133.4
676.3
79.2
333.1
186.8
146.3
59.4
471.7
—
43.4
84.5
—
— 127.9
599.6
3.8
Stage 3 Financial (1) Property Other (2)
£bn
£bn
£bn
£bn
Total Stage 3
£bn
£bn
Total Stage 3
£bn
£bn
—
3.8
2.1
1.7
—
3.8
0.3
0.6
0.9
4.7
—
3.9
2.6
1.3
—
3.9
0.3
0.3
0.6
4.5
—
38.6
0.3
38.3
—
38.6
—
3.3
3.3
41.9
—
11.5
0.1
11.4
—
11.5
—
0.6
0.6
12.1
—
232.7
189.5
43.2
—
232.7
4.1
7.6
11.7
244.4
—
212.1
172.7
39.4
—
212.1
4.4
6.3
10.7
222.8
—
23.7
—
295.0
— 189.8
105.2
—
295.0
23.7
—
23.7
—
4.6
4.6
28.3
4.1
15.5
19.6
314.6
—
28.3
—
251.9
— 172.8
79.1
—
251.9
28.3
—
28.3
— 122.7
71.4
3.3
12.0
1.9
59.4
1.4
53.8
—
247.9
3.3
—
0.1
0.1
3.4
—
3.4
2.4
1.0
—
3.4
34.9
78.9
113.8
361.7
79.2
81.2
14.0
67.2
59.4
219.8
—
6.3
6.3
34.6
4.4
13.2
17.6
269.5
—
39.0
71.3
—
— 110.3
330.1
3.4
—
0.5
0.2
0.3
—
0.5
0.3
0.5
0.8
1.3
—
0.5
0.2
0.3
—
0.5
0.3
0.3
0.6
1.1
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
Notes:
(1)
(2)
Includes cash and securities collateral.
Includes guarantees, charges over trade debtors, other asset finance related physical collateral as well as the amount by which credit risk exposure is reduced
through netting arrangements, mainly cash management pooling, which give NatWest Group a legal right to set off the financial asset against a financial liability
due to the same counterparty.
(3) NatWest Group holds collateral in respect of individual loans – amortised cost to banks and customers. This collateral includes mortgages over property (both
personal and commercial); charges over business assets such as plant and equipment; inventories and trade debtors; and guarantees of lending from parties
other than the borrower. NatWest Group obtains collateral in the form of securities in reverse repurchase agreements. Collateral values are capped at the value
of the loan.
(4) Stage 3 mortgage exposures have relatively limited uncovered exposure reflecting the security held. On unsecured credit cards and other personal borrowing,
the residual uncovered amount reflects historical experience of continued cash recovery post default through on going engagement with customers.
(5) Stage 3 exposures post credit risk enhancement and mitigation in Wholesale mainly represent enterprise value and the impact of written down collateral values;
an individual assessment to determine ECL will consider multiple scenarios and in some instances allocate a probability weighting to a collateral value in excess
of the written down value.
(6) £0.3 billion (2019 – £0.3 billion) Personal Stage 3 balances primarily relate to loan commitments, the draw down of which is effectively prohibited.
(7) The Personal gross exposure value includes £10.0 billion (2019 – £9.6 billion) in respect of pipeline mortgages where a committed offer has been made to a
customer but where the funds have not yet been drawn down. When drawn down, the exposure would be covered by a security over the borrower’s property.
NatWest Group Annual Report and Accounts 2020
192
Risk and capital management
Credit risk – Banking activities continued
Personal portfolio
Disclosures in the Personal portfolio section include drawn exposure (gross of provisions).
2020
2019
Personal lending
Mortgages
Of which:
Owner occupied
Buy-to-let
Interest only - variable
Interest only - fixed
Mixed (1)
Impairment provisions (2)
Other personal lending (3)
Impairment provisions (2)
Total personal lending
Mortgage LTV ratios
- Total portfolio
- Stage 1
- Stage 2
- Stage 3
- Buy-to-let
- Stage 1
- Stage 2
- Stage 3
Gross new mortgage lending (4)
Of which:
Owner occupied
Weighted average LTV
Buy-to-let
Weighted average LTV
Interest only - variable rate
Interest only - fixed rate
Mixed (1)
Mortgage forbearance
Forbearance flow
Forbearance stock
Current
1-3 months in arrears
> 3 months in arrears
Retail
Banking
£m
163,107
Ulster
Bank RoI
£m
13,678
148,614
14,493
5,135
13,776
7,321
483
11,116
1,348
174,223
12,781
897
159
10
56
499
276
15
13,954
56%
55%
66%
53%
52%
51%
60%
56%
30,551
29,608
69%
943
62%
81
1,501
1,630
550
1,293
648
360
285
59%
57%
65%
67%
59%
55%
69%
74%
910
908
74%
2
54%
—
—
—
127
1,627
1,070
105
452
Private
RBS
Banking International
£m
£m
10,910
Total
£m
2,517 190,212
9,601
1,309
4,375
4,758
1
5
1,613
20
12,523
58%
58%
61%
64%
56%
56%
59%
54%
2,148
1,922
66%
227
62%
1,082
695
—
50
18
13
3
2
1,676 172,672
17,540
10,016
18,777
7,398
996
13,284
1,384
2,796 203,496
841
347
233
20
9
279
1
57%
57%
64%
75%
53%
53%
53%
61%
249
167
66%
82
63%
7
35
2
10
10
9
—
1
57%
55%
66%
60%
53%
52%
61%
62%
33,858
32,605
69%
1,254
62%
1,170
2,231
1,632
737
2,948
1,740
468
740
Retail
Banking
£m
147,489
132,698
14,791
6,279
12,891
6,288
309
12,778
1,087
160,267
57%
57%
58%
55%
53%
52%
57%
59%
31,857
30,779
70%
1,078
61%
56
1,275
1,074
450
1,212
623
338
251
Ulster
Bank RoI
£m
13,598
12,593
1,005
165
9
61
622
308
13
13,906
60%
57%
67%
73%
61%
57%
69%
75%
1,184
1,175
75%
10
58%
—
—
1
177
2,229
1,149
157
923
Private
RBS
Banking International
£m
£m
9,955
Total
£m
2,620 173,662
8,714
1,241
3,646
4,604
1
13
1,767
16
11,722
57%
57%
60%
70%
54%
54%
57%
58%
2,112
1,889
65%
222
60%
688
993
—
4
2
1
—
1
1,747 155,752
17,911
10,461
17,745
6,370
955
15,133
1,117
2,900 188,795
874
371
241
20
11
280
1
58%
57%
64%
80%
53%
53%
51%
66%
355
248
71%
107
63%
4
51
4
5
11
9
1
1
57%
57%
59%
66%
54%
52%
59%
67%
35,508
34,091
69%
1,417
60%
748
2,319
1,079
636
3,454
1,782
496
1,176
Notes:
(1)
Includes accounts which have an interest only sub-account and a capital and interest sub-account to provide a more comprehensive view of interest only
exposures.
(2) Retail Banking excludes a non-material amount of provisions held on relatively small legacy portfolios.
(3) Comprises unsecured lending except for Private Banking, which includes both secured and unsecured lending. It excludes loans that are commercial in nature.
(4) Retail Banking excludes additional lending to existing customers.
Key points
Although the economic outlook deteriorated, reflected in the IFRS 9
stage migrations and ECL described earlier, the overall credit risk
profile and underlying performance of the Personal portfolio
remained stable during 2020.
Personal lending increased during 2020 primarily due to mortgage
growth and, in Retail Banking the acquisition of a £3 billion portfolio
of owner occupied mortgages from Metro Bank. Unsecured lending
reduced due to lower credit cards and overdraft usage during
COVID-19.
New mortgage lending was slightly lower than in 2019. COVID-19
restrictions affected volumes in the second and third quarters of the
year. The existing mortgage stock and new business were closely
monitored against agreed risk appetite parameters. These included
loan-to-value ratios, buy-to-let concentrations, new-build
concentrations and credit quality. These criteria were appropriately
amended during the year to manage the effects of COVID-19 on
the credit risk profile and underwriting standards were maintained.
As at 31 December 2020, £2 billion (1%) of the UK Retail Banking
mortgage portfolio had active COVID-19 payment holidays. This
compared with £37 billion (22%) which had requested a payment
holiday during 2020.
Mortgage growth was driven by the owner occupied portfolio.
By value, the proportion of mortgages on interest only and mixed
terms (capital and interest only) reduced. This was mainly due to
low proportions of buy-to-let and owner occupier interest only new
business.
37% of the stock of lending was in Greater London and the South
East (2019 – 35%). The average weighted loan-to-value for these
regions was 54% (2019 – 52%) compared to all regions 56%.
In the Retail Banking mortgage portfolio, 83% of customer
balances were on fixed rates (61% of these on five-year deals). In
addition, 99% of all new mortgage completions were fixed rate
deals (45% of these on five-year deals).
Unsecured balances declined, with the decrease primarily a result
of reductions in overdrafts and credit card utilisation in Retail
Banking, following the COVID-19 lockdown. NatWest Group also
responded to COVID-19 with a more cautious approach to new
lending, to protect NatWest Group and customers from potentially
unaffordable borrowing.
As detailed previously, the deteriorated economic outlook, including
forecast increases in unemployment and declines in house prices,
resulted in an increased ECL requirement.
NatWest Group Annual Report and Accounts 2020
193
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Personal portfolio
Mortgage LTV distribution by stage
The table below shows gross mortgage lending and related ECL by LTV band. Mortgage lending not within the scope of IFRS 9 ECL reflected
portfolios carried at fair value.
Mortgages
ECL provisions
ECL provisions coverage (2)
Retail Banking
2020
≤50%
>50% and ≤70%
>70% and ≤80%
>80% and ≤90%
>90% and ≤100%
>100% and ≤110%
>110% and ≤130%
>130% and ≤150%
>150%
Total with LTVs
Other
Total
2019
≤50%
>50% and ≤70%
>70% and ≤80%
>80% and ≤90%
>90% and ≤100%
>100% and ≤110%
>110% and ≤130%
>130% and ≤150%
>150%
Total with LTVs
Other
Total
Ulster Bank RoI
2020
≤50%
>50% and ≤70%
>70% and ≤80%
>80% and ≤90%
>90% and ≤100%
>100% and ≤110%
>110% and ≤130%
>130% and ≤150%
>150%
Total with LTVs
Stage 2
Stage 1
£m
£m
5,009
50,170
7,416
55,263
9,555
19,994
5,552
8,029
137
368
31
19
45
23
20
5
3
1
133,872 27,768
4
133,889 27,772
17
3,375
47,746
3,804
47,224
1,568
23,235
1,111
14,030
174
3,401
34
42
38
47
22
19
3
6
135,747 10,132
3
135,768 10,135
21
Stage 3
£m
554
488
141
52
13
6
6
5
3
1,268
1
1,269
511
463
150
85
20
8
7
6
3
1,253
1
1,254
Not within
IFRS 9
ECL
scope
£m
Total
£m
124 55,857
35 63,202
Of
which;
gross new
lending
£m
4,207
9,083
8 29,698 11,060
5,175
6 13,639
865
520
2
—
57
1
—
75
1
—
30
—
—
7
—
177 163,085 30,390
161
22
177 163,107 30,551
—
4,661
159 51,791
8,723
91 51,582
8,366
39 24,992
8,675
25 15,251
1,208
3,610
15
—
85
1
—
93
1
—
48
1.0
—
12
—
332 147,464 31,633
224
25
332 147,489 31,857
—
4,156
3,453
1,569
1,214
372
119
53
6
5
10,947
504
453
232
190
145
76
63
8
4
1,675
354
230
114
105
88
74
64
17
10
1,056
— 5,014
— 4,136
— 1,915
— 1,509
605
—
269
—
180
—
31
—
—
19
— 13,678
78
194
346
286
1
4
1
—
—
910
2019
≤50%
>50% and ≤70%
>70% and ≤80%
>80% and ≤90%
>90% and ≤100%
>100% and ≤110%
>110% and ≤130%
>130% and ≤150%
>150%
Total with LTVs
Notes:
(1) Excludes a non-material amount of provisions held on relatively small legacy portfolios.
(2) ECL provisions coverage is ECL provisions divided by mortgages.
— 4,890
— 4,065
— 1,751
— 1,494
671
—
375
—
270
—
57
—
25
—
— 13,598
4,107
3,382
1,381
1,132
381
167
82
8
7
10,647
107
231
356
484
3
2
1
—
—
1,184
308
274
151
145
102
57
36
3
3
1,079
475
409
219
217
188
151
152
46
15
1,872
Stage 1 Stage 2 Stage 3 Total (1)
£m
154
154
89
66
8
3
5
2
1
482
1
483
£m
43
66
56
52
5
2
3
1
—
228
—
228
£m
107
81
26
11
3
1
2
1
1
233
1
234
£m
4
7
7
3
—
—
—
—
—
21
—
21
Stage 1 Stage 2 Stage 3
%
19.4
16.5
18.5
20.3
26.8
22.1
31.1
23.0
44.4
18.5
71.9
18.5
%
0.8
0.9
0.6
0.9
3.4
6.2
7.6
7.2
9.4
0.8
3.6
0.8
%
0.0
0.0
0.0
0.0
0.1
0.1
0.3
0.0
0.1
0.0
0.1
0.0
2
3
2
2
1
—
—
—
—
10
—
10
10
8
4
3
1
1
—
—
—
27
4
3
2
1
1
—
—
—
—
11
19
29
14
12
4
2
2
1
—
83
—
83
24
23
12
11
9
5
5
1
1
91
7
7
4
5
3
2
2
—
—
30
90
68
26
18
5
2
2
2
2
215
1
216
105
66
40
40
40
37
35
10
8
381
97
90
60
76
72
67
78
30
11
581
111
100
42
32
10
4
4
3
2
308
1
309
139
97
56
54
50
43
40
11
9
499
108
100
66
82
76
69
80
30
11
622
—
—
—
—
—
0.1
0.1
0.1
0.1
—
0.1
—
0.6
0.8
0.9
1.1
2.5
5.1
6.1
6.3
6.5
0.8
4.2
0.8
4.8
0.2
5.1
0.2
5.2
0.3
5.8
0.2
6.2
0.3
6.6
0.8
—
7.9
— 12.5
— 25.0
5.4
0.2
0.1
0.1
0.1
0.1
0.2
0.3
0.3
0.6
0.3
0.1
2.3
2.6
3.0
3.0
2.9
3.5
4.9
4.1
8.2
2.8
17.6
14.7
17.1
20.5
25.4
25.3
33.5
27.7
45.7
17.0
81.2
17.1
29.7
28.7
35.1
38.1
45.5
50.0
54.7
58.8
80.0
36.1
20.5
22.0
27.5
35.1
38.6
44.0
51.3
64.7
71.4
31.0
Total
%
0.3
0.2
0.3
0.5
1.6
5.6
7.3
8.5
22.6
0.3
3.3
0.3
0.2
0.2
0.2
0.2
0.3
4.4
5.0
6.5
15.2
0.2
3.2
0.2
2.8
2.3
2.9
3.6
8.3
16.0
22.2
35.5
47.4
3.6
2.2
2.5
3.8
5.5
11.3
18.4
29.7
51.9
44.6
4.6
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Key points
ECL coverage rates increased through the LTV bands with both
Retail Banking and Ulster Bank RoI having only limited exposures
in the highest LTV bands. The relatively high coverage level in the
lowest LTV band for Retail Banking included the effect of time-
discounting on expected recoveries. Additionally, this also reflected
the modelling approach that recognised an element of expected
loss on mortgages that were not subject to formal repossession
activity.
The deteriorated economic outlook resulted in increased account
level IFRS 9 PDs. Consequently, compared to the 2019 year-end,
a larger proportion of accounts exhibited a SICR with an associated
migration of exposures from Stage 1 to Stage 2.
NatWest Group Annual Report and Accounts 2020
194
Risk and capital management
Credit risk – Banking activities continued
Personal portfolio
Retail Banking mortgage LTV distribution by region
The table below shows gross mortgage lending by LTV band for Retail Banking, by geographical region.
2020
South East
Greater London
Scotland
North West
South West
West Midlands
East of England
Rest of the UK
Total
2019
South East
Greater London
Scotland
North West
South West
West Midlands
East of England
Rest of the UK
Total
≤50%
£m
10,980
13,044
3,594
4,849
5,086
3,366
6,487
8,451
55,857
10,155
13,199
3,395
4,618
4,482
3,086
5,841
7,014
51,790
50%
≤80%
£m
17,217
14,505
6,636
9,745
8,551
7,080
10,294
18,869
92,897
13,676
10,496
5,946
8,788
7,374
6,109
8,716
15,469
76,574
80%
≤100%
£m
2,365
1,638
1,148
1,402
882
1,265
1,588
3,873
14,161
2,705
1,504
1,726
1,733
1,391
1,520
1,948
6,334
18,861
100%
≤150%
£m
4
2
1
3
3
4
2
143
162
6
4
3
6
5
5
3
194
226
>150%
£m
—
—
—
—
—
—
—
8
8
Weighted
Total average LTV
%
56
52
58
58
55
59
56
60
56
£m
30,566
29,189
11,379
15,999
14,522
11,715
18,371
31,344
163,085
—
—
—
—
—
—
—
13
13
26,542
25,203
11,070
15,145
13,252
10,720
16,508
29,024
147,464
55
49
60
59
57
60
57
64
57
Other
£m
5
5
1
3
2
1
2
3
22
5
4
1
3
2
1
3
6
25
Total
£m
30,571
29,194
11,380
16,002
14,524
11,716
18,373
31,347
163,107
26,547
25,207
11,071
15,148
13,254
10,721
16,511
29,030
147,489
Total
%
19
18
7
10
9
7
11
19
100
18
17
8
10
9
7
11
20
100
Note:
(1) 2020 regional data was based on the Office for National Statistics mapping (previously Halifax), therefore 2019 data has been represented on the same basis.
Commercial real estate (CRE)
The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential properties
(including house builders but excluding housing associations, construction and the building materials sub-sector). The sector is reviewed
regularly by senior executive committees. Reviews include portfolio credit quality, capital consumption and control frameworks. All disclosures in
the CRE section are based on current exposure (gross of provisions and risk transfer). Current exposure is defined as: loans; the amount drawn
under a credit facility plus accrued interest; contingent obligations; the issued amount of the guarantee or letter of credit; derivatives – the mark-
to-market value, netted where netting agreements exist and net of legally enforceable collateral.
By geography and sub-sector (1)
Investment
Residential (2)
Office (3)
Retail (4)
Industrial (5)
Mixed/other (6)
Development
Residential (2)
Office (3)
Retail (4)
Industrial (5)
Mixed/other (6)
Total
UK
£m
4,507
3,386
5,423
2,773
2,688
18,777
2,685
123
126
125
24
3,083
21,860
2020
RoI
£m
360
226
68
18
154
826
200
30
—
2
2
234
1,060
Other
£m
Total
£m
UK
£m
14
28
118
202
74
436
3
—
—
—
—
3
439
4,881
3,640
5,609
2,993
2,916
20,039
2,888
153
126
127
26
3,320
23,359
4,507
2,916
5,277
2,457
3,672
18,829
2,464
78
134
85
16
2,777
21,606
2019
RoI
£m
462
183
63
18
187
913
165
17
2
2
2
188
1,101
Other
£m
27
83
62
115
56
343
5
—
1
—
—
6
349
Total
£m
4,996
3,182
5,402
2,590
3,915
20,085
2,634
95
137
87
18
2,971
23,056
Notes:
(1) Geographical splits are based on country of collateral risk.
(2) Properties including houses, flats and student accommodation.
(3) Properties including offices in central business districts, regional headquarters and business parks.
(4) Properties including high street retail, shopping centres, restaurants, bars and gyms.
(5) Properties including distribution centres, manufacturing and warehouses.
(6) Properties that do not fall within the other categories above. Mixed generally relates to a mixture of retail/office with residential.
NatWest Group Annual Report and Accounts 2020
195
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Commercial real estate (CRE)
CRE LTV distribution by stage
The table below shows CRE current exposure and related ECL by LTV band.
Current exposure (gross of provisions) (1,2)
ECL provisions
ECL provisions coverage (4)
2020
≤50%
>50% and ≤70%
>70% and ≤80%
>80% and ≤90%
>90% and ≤100%
>100% and ≤110%
>110% and ≤130%
>130% and ≤150%
>150%
Total with LTVs
Total portfolio
average LTV%
Other (5)
Development (6)
Total
2019
≤50%
>50% and ≤70%
>70% and ≤80%
>80% and ≤90%
>90% and ≤100%
>100% and ≤110%
>110% and ≤130%
>130% and ≤150%
>150%
Total with LTVs
Total portfolio
average LTV%
Other (5)
Development (6)
Total
Stage 1
£m
4,918
2,815
39
84
46
6
9
12
23
Stage 2
£m
4,538
3,266
222
35
26
6
22
12
24
Stage 3
£m
138
226
23
36
65
63
117
10
105
Not within
IFRS 9 ECL
scope (3)
Total
£m
£m
— 9,594
— 6,307
284
—
155
—
137
—
75
—
148
—
34
—
152
—
Stage 1 Stage 2 Stage 3 Total (1)
£m
215
207
25
17
35
11
47
6
55
£m
145
112
17
4
2
1
2
1
2
£m
46
32
1
2
—
—
—
—
—
£m
24
63
7
11
33
10
45
5
53
Stage 1 Stage 2 Stage 3
%
17.4
27.9
30.4
30.6
50.8
15.9
38.5
50.0
50.5
%
%
0.9
3.2
1.1
3.4
2.6
7.7
2.4
11.4
7.7
—
— 16.7
9.1
—
8.3
—
8.3
—
Total
%
2.2
3.3
8.8
11.0
25.5
14.7
31.8
17.6
36.2
7,952
8,151
783
— 16,886
81
286
251
618
1.0
3.5
32.1
3.7
45% 47% 93%
159
511
161
1,767
1,103
11,090 10,429
1,776
1,362
— 48%
3,153
3,320
737 23,359
707
30
6
15
102
40
58
384
8,787
4,945
269
61
50
18
20
3
63
14,216
468
252
38
19
81
13
26
6
6
909
40
148
51
15
22
52
46
18
37
429
46% 55% 101%
123
149
658
144
272
2,377
696
1,330
17,251
837 10,132
6,191
846
367
9
97
2
154
1
83
—
93
1
27
—
106
—
1,696 17,250
48% 48%
2,835
2,971
3,779 23,056
1,905
178
8
7
1
—
—
—
—
—
—
16
5
8
29
8
6
1
1
2
—
1
—
1
20
4
4
28
93
70
414
11
33
19
3
15
5
16
7
24
133
54
73
260
139
143
900
27
46
21
4
17
5
17
7
25
169
63
85
317
0.3
1.1
0.9
7.8
3.3
3.7
58.5
43.5
37.5
0.1
0.1
0.4
—
—
—
—
—
— 16.7
2.2
0.1
27.5
1.7
22.3
2.4
37.3
2.6
20.0
5.3
68.2
2.5
9.6
—
3.8
34.8
— 38.9
64.9
31.0
0.8
0.3
0.2
2.7
1.5
2.1
43.9
50.7
37.4
5.7
4.3
4.0
0.3
0.9
5.9
4.2
11.1
6.0
18.5
25.9
23.6
1.1
6.8
3.0
1.6
Notes:
(1) Comprises gross lending, interest rate hedging derivatives and other assets carried at fair value that are managed as part of the overall CRE portfolio.
(2) The exposure in Stage 3 mainly related to legacy assets.
(3)
(4) ECL provisions coverage is ECL provisions divided by current exposure.
(5) Relates mainly to business banking, rate risk management products and unsecured corporate lending. The low Stage 3 ECL provisions coverage was driven by
Includes exposures relating to non-modelled portfolios and other exposures carried at fair value, including derivatives.
a single large exposure, which was written down to the expected recoverable amount.
(6) Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
Key points
Overall – The majority of the CRE portfolio was located and
managed in the UK. Business appetite and strategy remained
aligned across the segments.
2020 trends – The portfolio remained broadly unchanged in
composition although a migration of some assets from the
mixed/other sub-sector was noted, following a reclassification
carried out during the year. While new activity in 2020 was subdued
due to COVID-19, NatWest Group supported existing customers
with capital repayment holidays, interest roll-ups and extensions
using CRE specific criteria and government backed COVID-19
support schemes. Demand for scheme support reduced in the latter
part of the year.
The retail and leisure sectors were heavily affected by the
lockdown, resulting in low rental payments, and these sectors
remained under stress. The office sector was more resilient overall,
albeit the smaller serviced-office sub-sector came under some
stress given the short-term nature of income and site closures.
Demand for office space in the medium-term was expected to
decline, with flexible working trends continuing post COVID-19.
Market sentiment remained negative for most retail assets, but there
were tentative signs of improvement for retail warehousing
(accounting for approximately
15% of the retail sub-sector) where investment in industrial assets
was demonstrating increased demand. The residential development
sector continued to attract institutional capital and was generally
performing well.
Credit quality – Despite significant challenges across the CRE
sector, with customers utilising COVID-19 related government
support measures, Heightened Monitoring inflows by volume were
stable. By value however, Heightened Monitoring and Risk of Credit
Loss exposures increased, with a rise of migration into AQ10. This
increase was largely due to individually significant names,
particularly in the retail sub-sector.
Risk appetite – Appetite in CRE remained cautious. Pre-COVID-19
conservative lending criteria remained in place, including lower
leverage required for new London office originations and parts of
the retail sector. From January 2021, new minimum standards were
introduced for CRE lending appetite for residential new build
lending, which requires properties to achieve a minimum Energy
Performance Certificate rating of B. In addition, standard lending
terms for CRE now include NatWest Group’s preference for green
leases to be used by commercial landlords. Green leases are a
mechanism for landlords and tenants to work together to improve
the sustainability of a building.
NatWest Group Annual Report and Accounts 2020
196
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Flow statements
The flow statements that follow show the main ECL and related
income statement movements. They also show the changes in ECL as
well as the changes in related financial assets used in determining
ECL. Due to differences in scope, exposures in this section may
therefore differ from those reported in other tables, principally in
relation to exposures in Stage 1 and Stage 2. These differences do not
have a material ECL impact. Other points to note:
Financial assets include treasury liquidity portfolios, comprising
balances at central banks and debt securities, as well as loans.
Both modelled and non-modelled portfolios are included.
Stage transfers (for example, exposures moving from Stage 1 to
Stage 2) are a key feature of the ECL movements, with the net re-
measurement cost of transitioning to a worse stage being a primary
driver of income statement charges. Similarly, there is an ECL
benefit for accounts improving stage.
Changes in risk parameters shows the reassessment of the ECL
within a given stage, including any ECL overlays and residual
income statement gains or losses at the point of write-off or
accounting write-down.
Other (P&L only items) includes any subsequent changes in the
value of written-down assets (for example, fortuitous recoveries)
along with other direct write-off items such as direct recovery costs.
Other (P&L only items) affects the income statement but does not
affect balance sheet ECL movements.
Amounts written-off represent the gross asset written-down against
accounts with ECL, including the net asset write-down for any debt
sale activity.
There were small ECL flows from Stage 3 to Stage 1. This does not,
however, indicate that accounts returned from Stage 3 to Stage 1
directly. On a similar basis, there were flows from Stage 1 to Stage
3 including transfers due to unexpected default events. The small
number of write-offs in Stage 1 and Stage 2 reflect the effect of
portfolio debt sales and also staging at the start of the analysis
period.
The effect of any change in PMAs during the year is typically
reported under changes in risk parameters, as are any impacts
arising from changes to the underlying models. Refer to the section
on Governance and post model adjustments for further details.
All movements are captured monthly and aggregated. Interest
suspended post default is included within Stage 3 ECL with the
movement in the value of suspended interest during the year
reported under currency translation and other adjustments.
NatWest Group total
At 1 January 2020
Currency translation and other adjustments
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Unwinding of discount
At 31 December 2020
Net carrying amount
At 1 January 2019
2019 movements
At 31 December 2019
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
428,604
3,334
(117,545)
48,342
(574)
325
84,180
—
446,666
446,147
422,541
6,063
428,604
428,282
ECL
£m
322
2
(581)
865
(3)
35
(689)
366
202
—
(121)
—
—
519
297
25
322
Financial
assets
£m
28,630
(304)
117,545
(48,342)
(3,327)
1,728
(14,261)
(2)
81,667
78,586
27,360
1,270
28,630
27,878
ECL
£m
752
5
581
(865)
(303)
165
2,204
815
(271)
(1)
2,747
(2)
—
3,081
772
(20)
752
Financial
assets
£m
7,135
142
—
—
3,901
(2,053)
(1,666)
(935)
6,524
3,938
8,251
(1,116)
7,135
4,417
ECL
£m
2,718
11
—
—
306
(200)
493
328
(44)
(161)
616
(935)
(91)
2,586
2,782
(64)
2,718
Financial
assets
£m
464,369
3,172
—
—
—
—
68,253
(937)
534,857
528,671
458,152
6,217
464,369
460,577
ECL
£m
3,792
18
—
—
—
—
2,008
1,509
(113)
(162)
3,242
(937)
(91)
6,186
3,851
(59)
3,792
NatWest Group Annual Report and Accounts 2020
197
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Flow statements
Retail Banking - mortgages
At 1 January 2020
Currency translation and other adjustments
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Unwinding of discount
At 31 December 2020
Net carrying amount
At 1 January 2019
2019 movements
At 31 December 2019
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
135,625
—
(28,812)
8,899
(16)
9
16,685
—
132,390
132,367
127,671
7,954
135,625
135,613
ECL
£m
12
—
(8)
18
—
1
(16)
8
8
—
—
—
—
23
10
2
12
Financial
assets
£m
10,283
—
28,812
(8,899)
(566)
360
(1,911)
—
28,079
27,852
10,241
42
10,283
10,197
ECL
£m
86
—
8
(18)
(22)
23
165
(2)
(13)
—
150
—
—
227
74
12
86
Financial
assets
£m
1,289
19
—
—
582
(369)
(219)
(11)
1,291
1,055
1,286
3
1,289
1,074
ECL
£m
215
19
—
—
22
(24)
5
57
(13)
(25)
24
(11)
(34)
236
202
13
215
Financial
assets
£m
147,197
19
—
—
—
—
14,555
(11)
161,760
161,274
139,198
7,999
147,197
146,884
ECL
£m
313
19
—
—
—
—
154
63
(18)
(25)
174
(11)
(34)
486
286
27
313
Key points
The increase in ECL in Stage 2 was primarily due to the
deterioration in the economic outlook, causing both PDs and LGDs
to increase. Stage 1 ECL increased reflecting the economic
environment, and also approximately £9 million of ECL resulted from
the acquisition of the owner-occupied mortgage portfolio from Metro
Bank.
The updated economics also resulted in a net migration of assets
from Stage 1 to Stage 2 with a consequent increase from a 12
month ECL to a lifetime ECL. While the granting of a COVID-19
related payment holiday did not automatically trigger a migration to
Stage 2, a subset of customers who had accessed payment holiday
support, and where their risk profile was identified as relatively high
risk, were collectively migrated to Stage 2 and their ECL uplifted,
refer to the Governance and post model adjustments section for
further details.
In Stage 3, reflecting the various customer support mechanisms
available, ECL was less affected than in Stage 2. The relatively
small ECL cost for net re-measurement on stage transfer included
the effect of risk targeted ECL adjustments when previously in Stage
2. Refer to the Governance and post model adjustments section for
further details.
In Stage 3, the ECL cost within changes in risk parameters included
the monthly assessment of the loss requirement, capturing
underlying portfolio movements.
Write-off occurs once the repossessed property has been sold and
there is a residual shortfall balance remaining outstanding. Write-off
would typically be within five years from default but can be longer.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
198
Risk and capital management
Credit risk – Banking activities continued
Flow statements
Retail Banking - credit cards
At 1 January 2020
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Unwinding of discount
At 31 December 2020
Net carrying amount
At 1 January 2019
2019 movements
At 31 December 2019
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
2,804
(1,485)
1,059
(18)
—
(110)
—
2,250
2,198
2,632
172
2,804
2,766
ECL
£m
38
(56)
105
(1)
—
(71)
10
27
—
(34)
—
—
52
36
2
38
Financial
assets
£m
1,246
1,485
(1,059)
(110)
12
(190)
—
1,384
1,164
1,226
20
1,246
1,115
ECL
£m
131
56
(105)
(40)
7
261
(63)
(27)
—
171
—
—
220
118
13
131
Financial
assets
£m
127
—
—
128
(12)
(36)
(93)
114
39
108
19
127
39
ECL
£m
88
—
—
41
(7)
44
10
(2)
(3)
49
(93)
(6)
75
73
15
88
Financial
assets
£m
4,177
—
—
—
—
(336)
(93)
3,748
3,401
3,966
211
4,177
3,920
ECL
£m
257
—
—
—
—
234
(43)
(2)
(3)
186
(93)
(6)
347
227
30
257
Key points
The increase in ECL in Stage 1 and Stage 2 was primarily due to
the deterioration in the economic outlook, causing PDs to increase.
The updated economics also resulted in a net migration of assets
from Stage 1 to Stage 2 with a consequent increase from a 12
month ECL to a lifetime ECL.
In Stage 3, reflecting the various customer support mechanisms
available, new flows to default were suppressed and consequently
the ECL requirement reduced.
Charge-off (analogous to partial write-off) typically occurs after 12
missed payments.
Retail Banking - other personal unsecured
At 1 January 2020
Currency translation and other adjustments
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Unwinding of discount
At 31 December 2020
Net carrying amount
At 1 January 2019
2019 movements
At 31 December 2019
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
5,417
—
(3,953)
1,350
(16)
3
584
—
3,385
3,326
5,073
344
5,417
5,354
ECL
£m
63
—
(99)
96
(1)
2
(64)
47
15
—
(2)
—
—
59
54
9
63
Financial
assets
£m
2,250
—
3,953
(1,350)
(363)
61
(1,063)
(1)
3,487
3,037
1,970
280
2,250
1,998
ECL
£m
252
—
99
(96)
(124)
20
343
26
(69)
(2)
298
(1)
—
450
239
13
252
Financial
assets
£m
608
3
—
—
379
(64)
(57)
(273)
596
101
503
105
608
90
ECL
£m
518
3
—
—
125
(22)
108
67
(13)
(26)
136
(273)
(18)
495
402
116
518
Financial
assets
£m
8,275
3
—
—
—
—
(536)
(274)
7,468
6,464
7,546
729
8,275
7,442
ECL
£m
833
3
—
—
—
—
387
140
(67)
(28)
432
(274)
(18)
1,004
695
138
833
Key points
The increase in ECL in Stage 2 was primarily due to the
deterioration in the economic outlook, causing PDs to increase.
The updated economics also resulted in a net migration of assets
from Stage 1 to Stage 2 with a consequent increase from a 12
month ECL to a lifetime ECL. While the granting of a COVID-19
related payment holiday did not automatically trigger a migration to
Stage 2, a subset of customers who had accessed payment holiday
support, and where their risk profile was identified as relatively high
risk, were collectively migrated to Stage 2 and their ECL uplifted,
refer to the Governance and post model adjustments section for
further details.
In Stage 3, reflecting the various customer support mechanisms
available that mitigated against defaults, ECL was affected relatively
less. In addition, debt sales also contributed to a slight ECL
reduction year-on-year.
Write-off occurs once recovery activity with the customer has been
concluded or there are no further recoveries expected, but no later
than six years after default.
NatWest Group Annual Report and Accounts 2020
199
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Flow statements
Ulster Bank RoI - mortgages
At 1 January 2020
Currency translation and other adjustments
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Unwinding of discount
At 31 December 2020
Net carrying amount
At 1 January 2019
2019 movements
At 31 December 2019
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
10,603
589
(2,010)
1,665
(7)
29
50
—
10,919
10,892
10,782
(179)
10,603
10,592
ECL
£m
11
1
(7)
47
—
2
(44)
16
1
—
(27)
—
—
27
11
—
11
Financial
assets
£m
1,084
66
2,010
(1,665)
(65)
334
(81)
(1)
1,682
1,591
1,394
(310)
1,084
1,054
ECL
£m
30
2
7
(47)
(6)
34
46
28
(2)
—
72
(1)
—
91
75
(45)
30
Financial
assets
£m
1,875
95
—
—
72
(363)
(413)
(205)
1,061
680
2,278
(403)
1,875
1,294
ECL
£m
581
(32)
—
—
6
(36)
10
73
(1)
(24)
58
(205)
(15)
381
657
(76)
581
Financial
assets
£m
13,562
750
—
—
—
—
(444)
(206)
13,662
13,163
14,454
(892)
13,562
12,940
ECL
£m
622
(29)
—
—
—
—
12
117
(2)
(24)
103
(206)
(15)
499
743
(121)
622
Key points
The increase in ECL in Stage 1 and Stage 2 was primarily due to
the deterioration in the economic outlook.
The updated economics also resulted in a net migration of assets
from Stage 1 to Stage 2 with a consequent increase from a 12-
month ECL to a lifetime ECL.
The reduction in ECL in Stage 3 reflected ongoing deleveraging of
the Ulster Bank RoI mortgage non-performing portfolio through the
execution of a portfolio sale agreed in 2019.
In Stage 3, the ECL cost within changes in risk parameters included
the forward-looking effect of forecast reductions in house prices and
the application of post-model adjustments.
Write-off generally occurs once the repossessed property has been
sold and there is a residual shortfall balance remaining outstanding
or when the loan is sold to a third party.
Commercial Banking - commercial
real estate
At 1 January 2020
Currency translation and other adjustments
Inter-group transfers
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Unwinding of discount
At 31 December 2020
Net carrying amount
At 1 January 2019
2019 movements
At 31 December 2019
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
25,556
40
—
(14,605)
3,842
(120)
82
2,474
—
17,269
17,179
29,180
(3,624)
25,556
25,525
ECL
£m
31
(2)
—
(99)
59
—
7
(45)
106
33
—
94
—
—
90
37
(6)
31
Financial
assets
£m
2,218
(441)
—
14,605
(3,842)
(696)
292
(1,756)
—
10,380
10,016
1,500
718
2,218
2,190
ECL
£m
28
—
—
99
(59)
(18)
20
242
77
(25)
—
294
—
—
364
24
4
28
Financial
assets
£m
895
(4)
—
—
—
816
(374)
(174)
(41)
1,118
690
1,631
(736)
895
589
ECL
£m
306
—
—
—
—
18
(27)
102
69
6
—
177
(41)
(5)
428
459
(153)
306
Financial
assets
£m
28,669
(405)
—
—
—
—
—
544
(41)
28,767
27,885
32,311
(3,642)
28,669
28,304
ECL
£m
365
(2)
—
—
—
—
—
299
252
14
—
565
(41)
(5)
882
520
(155)
365
Key points
The increase in ECL in Stage 1 and Stage 2 was primarily due to
the deterioration in the economic outlook, causing both PDs and
LGDs to increase.
Flows into Stage 3 were mainly due to a relatively small number of
individual cases. Government support mechanisms continued to
suppress a higher level of flows into Stage 3.
The updated economics also resulted in a migration of assets from
Stage 1 to Stage 2 with a consequential increase from a 12 month
ECL to a lifetime ECL.
Stage 3 recovery values started to show evidence of being
negatively affected by deteriorated market conditions, leading to
higher ECL charges.
Other changes in net exposures increased in Stage 1 as customers
drew down on existing facilities and undertook new lending
supported by government schemes.
NatWest Group Annual Report and Accounts 2020
200
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Flow statements
Commercial Banking - business banking
At 1 January 2020
Currency translation and other adjustments
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Unwinding of discount
At 31 December 2020
Net carrying amount
At 1 January 2019
2019 movements
At 31 December 2019
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
6,338
—
(2,545)
790
(30)
11
7,558
—
12,122
12,081
6,303
35
6,338
6,310
ECL
£m
28
—
(18)
58
—
5
(56)
15
9
—
(32)
—
—
41
22
6
28
Financial
assets
£m
767
—
2,545
(790)
(138)
45
(245)
—
2,184
2,039
897
(130)
767
722
ECL
£m
45
(1)
18
(58)
(32)
17
147
29
(20)
(2)
154
—
—
145
43
2
45
Financial
assets
£m
257
1
—
—
168
(56)
(42)
(78)
250
77
245
12
257
57
ECL
£m
200
(2)
—
—
32
(22)
45
12
(11)
(48)
(2)
(78)
(3)
173
163
37
200
Financial
assets
£m
7,362
1
—
—
—
—
7,271
(78)
14,556
14,197
7,445
(83)
7,362
7,089
ECL
£m
273
(3)
—
—
—
—
136
56
(22)
(50)
120
(78)
(3)
359
228
45
273
Key points
The increase in ECL in Stage 1 and Stage 2 was primarily due to
the deterioration in the economic outlook, causing both PDs and
LGDs to increase.
The updated economics also resulted in a migration of assets from
Stage 1 to Stage 2 with a consequential increase from a 12 month
ECL to a lifetime ECL.
Flows of defaulted exposure into Stage 3 were suppressed
reflecting the various government customer support mechanisms
available, with ECL reducing during the year including the effect of a
debt sale.
Other changes in net exposures increased in Stage 1 as customers
drew down on existing facilities and undertook new lending
supported by government schemes.
The portfolio continued to benefit from cash recoveries post write-
off, which are reported as other (P&L only items). Write-off occurs
once recovery activity with the customer has been concluded or
there are no further recoveries expected, but no later than five years
after default.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
201
Risk and capital management
Credit risk – Banking activities continued
Flow statements
Commercial Banking - other
At 1 January 2020
Currency translation and other adjustments
Inter-group transfers
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Unwinding of discount
At 31 December 2020
Net carrying amount
At 1 January 2019
2019 movements
At 31 December 2019
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
53,722
311
464
(49,620)
24,151
(155)
119
10,287
—
39,279
39,140
52,312
1,410
53,722
53,628
ECL
£m
94
—
—
(227)
376
(1)
16
(304)
88
97
(1)
(120)
—
—
139
71
23
94
Financial
assets
£m
8,788
147
—
49,620
(24,151)
(1,073)
460
(7,810)
—
25,981
24,777
7,893
895
8,788
8,645
ECL
£m
143
—
1
227
(376)
(45)
34
731
592
(103)
(1)
1,219
—
—
1,204
131
12
143
Financial
assets
£m
1,386
15
(9)
—
—
1,228
(579)
(590)
(202)
1,249
781
730
656
1,386
870
ECL
£m
516
5
(2)
—
—
46
(50)
150
24
(13)
(18)
143
(202)
(6)
468
329
187
516
Financial
assets
£m
63,896
473
455
—
—
—
—
1,887
(202)
66,509
64,698
60,935
2,961
63,896
63,143
ECL
£m
753
5
(1)
—
—
—
—
577
704
(19)
(20)
1,242
(202)
(6)
1,811
531
222
753
Key points
The increase in ECL in Stage 1 and Stage 2 was primarily due to
the deterioration in the economic outlook, causing both PDs and
LGDs to increase.
The updated economics also resulted in the migration of assets
from Stage 1 to Stage 2 with a consequential increase from a 12
month ECL to a lifetime ECL.
The migration of exposures from Stage 2 to Stage 1 included the
effect of the slight reduction in PDs arising from the relative
improvement in the multiple economic scenarios in the second half
of the year compared to the mid-year point, partially reversing some
migrations into Stage 2 in the first half of 2020.
For flows into Stage 3, defaults were suppressed reflecting the
various government customer support mechanisms available.
Other changes in net exposures increased in Stage 1 as customers
drew down on existing facilities and undertook new borrowings
supported by the government schemes.
NatWest Markets (1)
At 1 January 2020
Currency translation and other adjustments
Inter-group transfers
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
At 31 December 2020
Net carrying amount
At 1 January 2019
2019 movements
At 31 December 2019
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
32,892
564
(1,230)
(2,757)
936
—
2,922
—
33,327
33,315
32,758
134
32,892
32,882
ECL
£m
10
—
—
(7)
11
—
(9)
6
1
—
(2)
—
12
7
3
10
Financial
assets
£m
188
(84)
—
2,757
(936)
(9)
(245)
—
1,671
1,622
732
(544)
188
183
ECL
£m
5
—
—
7
(11)
(3)
43
18
(10)
3
54
—
49
14
(9)
5
Financial
assets
£m
183
2
—
—
—
9
(15)
(11)
168
36
775
(592)
183
52
ECL
£m
131
7
2
—
—
3
4
(9)
5
(12)
(12)
(11)
132
179
(48)
131
Financial
assets
£m
33,263
482
(1,230)
—
—
—
2,662
(11)
35,166
34,973
34,265
(1,002)
33,263
33,117
ECL
£m
146
7
2
—
—
—
38
15
(4)
(9)
40
(11)
193
200
(54)
146
Note:
(1) Reflects the NatWest Markets segment and includes NWM N.V..
Key point
The increase in ECL in Stage 1 and Stage 2 was primarily due to the deterioration in the economic outlook, causing both PDs and LGDs to
increase.
NatWest Group Annual Report and Accounts 2020
202
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Stage 2 decomposition – arrears status and contributing factors
The tables below show Stage 2 decomposition for the Personal and Wholesale portfolios.
2020
Personal
Currently >30 DPD
Currently <=30 DPD
- PD deterioration
- PD persistence
- Other driver (adverse credit, forbearance etc)
Total Stage 2
2019
Personal
Currently >30 DPD
Currently <=30 DPD
- PD deterioration
- PD persistence
- Other driver (adverse credit, forbearance etc)
Total Stage 2
426
27,477
13,136
9,977
4,364
27,903
528
9,860
4,184
1,812
3,864
10,388
UK mortgages
Loans
£m
ECL
£m
RoI mortgages
Loans
£m
ECL
£m
Credit cards
Loans
£m
ECL
£m
Other
Total
Loans
£m
ECL
£m
Loans
£m
19
209
163
22
24
228
109
1,559
664
46
849
1,668
11
80
42
2
36
91
10
1,365
901
350
114
1,375
6
219
167
32
20
225
75
3,331
2,242
966
123
3,406
25
620
427 33,732
354 16,943
57 11,339
5,450
16
452 34,352
ECL
£m
61
935
726
113
96
996
14
73
60
5
8
87
21
1,056
208
252
596
1,077
3
28
15
4
9
31
16
1,243
727
422
94
1,259
6
126
92
20
14
132
92
2,218
1,482
540
196
2,310
19
657
234 14,377
6,601
188
3,026
29
4,750
17
253 15,034
42
461
355
58
48
503
Key points
The deteriorated economic outlook, including forecast increases in
unemployment, resulted in increased account level IFRS 9 PDs.
Consequently, compared to 2019, a larger proportion of accounts
exhibited a SICR causing Stage 2 exposures to increase
significantly.
In the absence of PD deterioration or other backstop SICR triggers,
the granting of a COVID-19 related payment holiday did not
automatically result in a migration to Stage 2.
However, a subset of customers who had accessed payment
holiday support, and where their risk profile was identified as
relatively high risk, were collectively migrated to Stage 2. For
mortgages, in Retail Banking, approximately £1 billion of exposures
were collectively migrated from Stage 1 to Stage 2, and
approximately £340 million in Ulster Bank RoI. The impact of
collective migrations on unsecured lending was much more limited.
As expected, ECL coverage was higher in accounts that were more
than 30 days past due than those in Stage 2 for other reasons.
2020
Wholesale
Currently >30 DPD
Currently <=30 DPD
- PD deterioration
- PD persistence
- Other driver (forbearance, RoCL etc)
Total Stage 2
2019
Wholesale
Currently >30 DPD
Currently <=30 DPD
- PD deterioration
- PD persistence
- Other driver (forbearance, RoCL etc)
Total Stage 2
Property
Corporate
Loans
£m
ECL
£m
Loans
£m
ECL
£m
Financial
institutions
Loans
£m
Other
Total
ECL
£m
Loans
£m
ECL
£m
Loans
£m
ECL
£m
136
12,885
11,765
162
958
13,021
57
2,523
1,386
45
1,092
2,580
6
215
501 27,501
450 23,268
623
3,610
507 27,716
5
46
28
1,459
1,229
20
210
1,487
110
3,514
3,182
7
325
3,624
2
45
28
1
16
47
219
9,485
6,083
183
3,219
9,704
6
192
144
5
43
198
7
539
368
2
169
546
—
90
85
—
5
90
—
4
3
—
1
4
—
204
97
—
107
204
—
4
3
—
1
4
—
461
1 44,104
— 38,312
792
—
1
5,000
1 44,565
34
2,051
1,764
25
262
2,085
—
283
— 12,551
— 7,840
—
230
— 4,481
— 12,834
8
241
175
6
60
249
Key points
The deteriorated economic outlook due to COVID-19, including
significant reductions in GDP and commercial real estate
valuations, resulted in increased IFRS 9 PDs. Consequently,
compared to 2019, a larger proportion of the exposures exhibited a
SICR causing Stage 2 exposures to increase significantly.
PD deterioration remained the primary trigger for identifying a SICR
and Stage 2 treatment, although there was also an increase in
arrears.
There was an increase in flows on to the Risk of Credit Loss
framework. However, these were recorded under PD deterioration
if the Stage 2 trigger was also met.
In Ulster Bank RoI, approximately £400 million of exposures
relating to small and medium size enterprises were collectively
migrated from Stage 1 to Stage 2 reflective of the elevated risk for
this sector.
NatWest Group Annual Report and Accounts 2020
203
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Stage 2 decomposition by a significant increase in credit risk trigger
2020
Personal trigger (1)
PD movement
PD persistence
Adverse credit bureau recorded with credit
reference agency
Forbearance support provided
Customers in collections
Other reasons
Days past due >30
2019
Personal trigger (1)
PD movement
PD persistence
Adverse credit bureau recorded with credit
reference agency
Forbearance support provided
Customers in collections
Other reasons
Days past due >30
UK mortgages
RoI mortgages
Credit cards
£m
%
£m
%
£m
%
Other
£m
%
Total
£m
%
13,520
9,977
2,936
138
131
1,165
36
27,903
4,583
1,815
3,236
163
137
339
115
10,388
48.4
35.8
10.5
0.5
0.5
4.2
0.1
100
44.0
17.5
31.2
1.6
1.3
3.3
1.1
100
751
46
—
7
30
832
2
1,668
223
252
—
3
74
525
—
1,077
45.0
2.8
—
0.4
1.8
49.9
0.1
100
20.7
23.4
—
0.3
6.9
48.7
—
100
911
350
66.2
25.5
2,310
968
67.8 17,492
28.4 11,341
51.0
33.0
51
1
2
60
—
1,375
3.7
0.1
0.1
4.4
—
100
46
9
14
55
4
3,406
3,033
1.4
155
0.3
177
0.4
2,112
1.6
42
0.1
100 34,352
742
422
59.0
33.5
1,538
542
66.6
23.5
7,086
3,031
59
—
3
33
—
1,259
4.7
—
0.2
2.6
—
100
102
10
36
56
26
2,310
3,397
4.4
176
0.4
250
1.6
953
2.4
1.1
141
100 15,034
8.8
0.5
0.5
6.1
0.1
100
47.1
20.2
22.6
1.2
1.7
6.3
0.9
100
For the note to this table refer to the following page.
Key points
The primary driver of credit deterioration was PD which, including
persistence, accounted for the majority of movements into Stage 2.
There was also a collective migration of a subset of customers who
had accessed payment holiday support, and where their risk profile
was identified as relatively high risk.
The increase in exposures in Stage 2 due to persistence, primarily
within UK mortgages, reflected the slight reduction in PDs arising
from the relative improvement in the multiple economic scenarios in
the second half of the year compared to the mid-year point;
exposures cannot migrate back to Stage 1 until their PD has been
back within the criteria threshold for three consecutive months.
High risk back-stops, for example, forbearance and adverse credit
bureau, provide additional valuable discrimination. However, with a
larger proportion of exposures triggering PD deterioration following
the deteriorated economic outlook, the proportion of accounts
triggering high risk backstops alone decreased.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
204
Risk and capital management
Credit risk – Banking activities continued
2020
Wholesale trigger (1)
PD movement
PD persistence
Risk of Credit Loss
Forbearance support provided
Customers in collections
Other reasons (2)
Days past due >30
2019
Wholesale trigger (1)
PD movement
PD persistence
Risk of Credit Loss
Forbearance support provided
Customers in collections
Other reasons (2)
Days past due >30
Property
Corporate
Financial
institutions
Other
£m
%
£m
%
£m
%
£m
%
Total
£m
11,849
162
394
73
30
462
51
13,021
91.1 23,403
624
1.2
2,106
3.0
133
0.6
115
0.2
1,262
3.5
0.4
73
100 27,716
1,416
45
915
31
10
146
17
2,580
54.8
1.7
35.5
1.2
0.4
5.7
0.7
100
6,129
183
2,394
140
47
659
152
9,704
84.3
2.3
7.6
0.5
0.4
4.6
0.3
100
63.1
1.9
24.7
1.4
0.5
6.8
1.6
100
3,183
7
66
27
1
231
109
3,624
368
3
69
29
—
71
6
546
87.9
0.2
1.8
0.7
—
6.4
3.0
100
67.4
0.5
12.6
5.3
—
13.0
1.1
100
97
—
39
—
—
68
—
204
—
19.1
—
—
33.3
—
47.6 38,532
793
2,605
233
146
2,023
233
100 44,565
3
—
—
—
—
1
—
4
7,916
75.0
—
231
— 3,378
200
—
—
57
877
25.0
175
—
100 12,834
%
86.6
1.8
5.8
0.5
0.3
4.5
0.5
100
61.7
1.8
26.3
1.6
0.4
6.8
1.4
100
Notes:
(1) The table is prepared on a hierarchical basis from top to bottom, for example, accounts with PD deterioration may also trigger backstop(s) but are only
reported under PD deterioration.
Includes customers where a PD assessment cannot be undertaken due to missing PDs.
(2)
Key points
PD deterioration continued to be the primary trigger of migration of
exposures from Stage 1 to Stage 2. As the economic outlook
deteriorated, it accounted for a higher proportion of the balances
migrated to Stage 2.
Moving exposures on to the Risk of Credit Loss framework
remained an important backstop indicator of a SICR. The
exposures classified under the Stage 2 Risk of Credit Loss
framework trigger decreased over the period as more exposures
were captured under the PD deterioration Stage 2 trigger.
PD persistence relates to the business banking portfolio only, with
the reason for the year-on-year increase the same as described
above for the Personal portfolio.
NatWest Group continued to appraise its IFRS 9 SICR rules in the
context of effectiveness, volatility and industry consistency. The
recent PD driven increase in Stage 2 exposures in the Wholesale
portfolio, highlighted the gradual diminished impact on ECL of the
threshold for better quality portfolios under stress, suggesting
possible conservatism in the SICR rules for these portfolios. As an
illustration, an increase of the de minimus PD threshold to 0.75%
(from 0.1%) in the SICR rules could decrease the Wholesale
portfolio Stage 2 exposure by 11% with only a four basis point
reduction on good book ECL coverage.
NatWest Group Annual Report and Accounts 2020
205
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Banking activities continued
Stage 3 vintage analysis
The table below shows estimated vintage analysis of the material Stage 3 portfolios totalling 83% of the Stage 3 loans of £6.4 billion.
Stage 3 loans (£bn)
Vintage (time in default):
<1 year
1-3 years
3-5 years
5-10 years
>10 years
2020
2019
Retail Banking Ulster Bank RoI
mortgages
1.1
mortgages
1.3
Wholesale
2.9
Retail Banking
mortgages
1.3
Ulster Bank RoI
mortgages
1.9
Wholesale
2.3
25%
32%
11%
22%
10%
100%
6%
18%
23%
36%
17%
100%
46%
16%
7%
31%
—
100%
32%
23%
11%
26%
8%
100%
13%
12%
23%
44%
8%
100%
37%
14%
9%
40%
—
100%
Key points
Retail Banking and Ulster Bank RoI mortgages – The proportion of
the Stage 3 defaulted population which have been in default for
over five years reflected NatWest Group’s support for customers in
financial difficulty. When customers continue to engage
constructively with NatWest Group, making regular
payments, NatWest Group continues to support them. NatWest
Group’s provisioning approach retains customers in Stage 3 for a
life-time loss provisioning calculation, even when their arrears
status reverts to below 90 days past due.
Wholesale – The increase in the proportion of loans in Stage 3 for
less than one year was mainly due to individually large exposures
within the CRE sector, which were new into Stage 3. Exposures
which were in Stage 3 for in excess of five years were mainly
related to customers being in a protracted formal insolvency
process or subject to litigation or a complaints process.
Asset quality
The table below shows asset quality bands of gross loans and ECL, by stage, for the Personal portfolio.
2020
UK mortgages
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
RoI mortgages
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10 (1)
Credit cards
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Other personal
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Total personal
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Gross loans
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
ECL provisions
Stage 2
£m
Stage 3
£m
ECL provisions coverage
Total
£m
Stage 1
%
Stage 2
%
Stage 3
%
Total
%
108,869
6,634
38,347 20,254
1,015
240
—
147,456 27,903
— 115,503
— 58,601
— 1,255
1,507
1,507 176,866
— 1,507
8,247
2,677
7
—
10,931
23
2,384
4
—
2,411
1,234
4,461
55
—
5,750
777
560
331
— 9,024
— 3,237
338
—
1,051
— 1,051
1,051 13,650
1,668
4
1,329
42
—
1,375
59
3,020
327
—
3,406
27
—
— 3,713
46
—
109
109
3,895
109
— 1,293
— 7,481
382
—
621
621
9,777
621
118,373
7,474
47,869 25,163
1,715
306
—
166,548 34,352
— 125,847
— 73,032
— 2,021
3,288
3,288 204,188
— 3,288
10
14
—
—
24
20
7
—
—
27
1
52
—
—
53
8
58
1
—
67
39
131
1
—
171
33
146
49
—
228
38
34
19
—
91
2
208
15
—
225
9
336
107
—
452
—
—
—
254
254
—
—
—
381
381
—
—
—
76
76
—
—
—
517
517
82
724
190
—
—
—
— 1,228
1,228
996
43
160
49
254
506
58
41
19
381
499
3
260
15
76
354
17
394
108
517
1,036
121
855
191
1,228
2,395
0.01
0.04
—
—
0.02
0.24
0.26
—
—
0.25
0.50
0.72
4.83
—
—
—
— 16.85
16.85
0.82
4.89
6.07
5.74
—
—
—
— 36.25
36.25
5.46
0.04
0.27
3.90
16.85
0.29
0.64
1.27
5.62
36.25
3.66
4.35
2.18
50.00
15.65
— 35.71
—
2.20
16.36
— 69.72
69.72
— 11.11
—
7.00
— 32.61
69.72
9.09
1.31
—
—
5.27
— 28.27
83.25
10.60
15.25
11.13
32.72
— 83.25
83.25
13.27
1.10
2.88
11.08
—
—
—
— 37.35
37.35
2.90
0.10
1.17
9.45
37.35
1.17
0.65
1.30
1.82
—
1.17
0.03
0.27
0.33
—
0.10
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
For the note to this table refer to the following page.
NatWest Group Annual Report and Accounts 2020
206
Risk and capital management
Credit risk – Banking activities continued
Asset quality
2019
UK mortgages
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
RoI mortgages
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10 (1)
Credit cards
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Other personal
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Total personal
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Gross loans
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
ECL provisions
Stage 2
£m
Stage 3
£m
90,494
58,039
96
—
2,579
6,939
870
— 93,073
— 64,978
966
—
1,414
— 1,414
1,414 160,431
148,629 10,388
6,215
4,416
1
—
10,632
364
2,734
5
—
3,103
1,231
6,127
78
—
7,436
212
615
250
— 6,427
— 5,031
251
—
1,863
— 1,863
1,863 13,572
1,077
11
1,187
61
—
1,259
59
2,045
206
—
2,310
375
—
— 3,921
66
—
116
116
4,478
116
— 1,290
— 8,172
284
—
643
643
643 10,389
98,304
2,861
71,316 10,786
1,387
180
—
169,800 15,034
— 101,165
— 82,102
— 1,567
4,036
4,036 188,870
— 4,036
6
8
—
—
14
4
7
—
—
11
1
39
—
—
40
4
59
2
—
65
15
113
2
—
130
7
55
25
—
87
4
19
8
—
31
1
112
19
—
132
5
195
53
—
253
—
—
—
240
240
—
—
—
581
581
—
—
—
89
89
—
—
—
539
539
17
381
105
—
—
—
— 1,449
1,449
503
Total
£m
13
63
25
240
341
8
26
8
581
623
2
151
19
89
261
9
254
55
539
857
32
494
107
1,449
2,082
ECL provisions coverage
Stage 3
%
Stage 2
%
Stage 1
%
0.01
0.01
—
—
0.01
0.06
0.16
—
—
0.10
0.27
0.79
2.87
—
—
—
— 16.97
16.97
0.84
1.89
3.09
3.20
—
—
—
— 31.19
31.19
2.88
Total
%
0.01
0.10
2.59
16.97
0.21
0.12
0.52
3.19
31.19
4.59
0.27
1.43
9.09
9.44
— 31.15
—
1.29
10.48
— 76.72
76.72
0.53
—
—
3.85
— 28.79
76.72
5.83
0.70
—
—
3.11
— 19.37
83.83
8.25
8.47
9.54
25.73
— 83.83
83.83
10.95
0.59
3.53
7.57
—
—
—
— 35.90
35.90
3.35
0.03
0.60
6.83
35.90
1.10
0.32
0.96
2.56
—
0.87
0.02
0.16
1.11
—
0.08
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Note:
(1) AQ10 includes £0.4 billion (2019 – £0.6 billion) of RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but are
included in Stage 3.
Key points
In the Personal portfolio, the asset quality distribution overall was
broadly stable with the Basel II point-in-time PDs yet to reflect the
expected credit deterioration.
The majority of exposures were in AQ1-AQ4, with a significant
proportion in AQ5-AQ8. As expected, mortgage exposures had a
higher proportion in AQ1-AQ4 than unsecured borrowing.
The high level of Stage 3 impaired assets (AQ10) in RoI
mortgages, reflected the legacy mortgage portfolio and the
residual effects from the global financial crisis. The reduction in the
year was a result of deleveraging through the execution of a
portfolio sale agreed in 2019 and improvements in the portfolio.
In other personal, the relatively high level of exposures in AQ10
reflected that impaired assets can be held on the balance sheet,
with commensurate ECL provision, for up to six years after default.
ECL provisions coverage showed the expected trend with
increased coverage in the poorer asset quality bands, and also by
stage.
NatWest Group Annual Report and Accounts 2020
207
Risk and capital management
Credit risk – Banking activities continued
Asset quality
The table below shows asset quality bands of gross loans and ECL, by stage, for the Wholesale portfolio.
Gross loans
ECL provisions
ECL provisions coverage
Stage 1
Stage 2
Stage 3
£m
£m
£m
Total
£m
Stage 1
Stage 2
Stage 3
£m
£m
£m
Total
£m
60
553
17
545
1,175
Stage 1
Stage 2
Stage 3
%
%
%
0.16
0.96
1.92
4.17
— 10.49
—
0.52
—
—
—
— 41.23
41.23
3.89
—
—
—
545
545
—
71
— 1,541
63
—
803
803
2,478
803
0.11
0.57
0.11
—
0.39
1.87
5.62
11.07
—
—
—
— 46.50
46.50
5.37
Total
%
0.41
2.56
4.09
41.23
3.09
0.35
2.86
4.23
46.50
3.20
2020
Property
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Corporate
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Financial institutions
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Sovereign
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Total
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
2019
Property
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Corporate
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Financial institutions
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Sovereign
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Total
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
2,079
12,694
10,785 10,780
162
254
—
23,733 13,021
— 14,773
— 21,565
416
—
1,322
— 1,322
1,322 38,076
— 20,483
— 53,835
— 1,488
1,727
1,727 77,533
— 1,727
17,757
2,726
29,405 24,430
560
928
—
48,090 27,716
42,222
1,776
4
—
44,002
4,731
17
3
—
4,751
1,985
1,453
186
—
3,624
106
98
—
—
204
— 44,207
— 3,229
—
190
17
17
17 47,643
— 4,837
115
—
3
—
4
4
4,959
4
77,404
6,896
41,983 36,761
908
1,189
—
120,576 44,565
— 84,300
— 78,744
— 2,097
3,070
3,070 168,211
— 3,070
15,590
17,268
38
—
32,896
22,373
37,133
183
—
59,689
32,297
3,406
4
—
35,707
4,133
142
—
—
4,275
413
2,115
52
—
2,580
— 16,003
— 19,383
90
—
895
895
895 36,371
616
8,803
285
— 22,989
— 45,936
468
—
1,649
— 1,649
1,649 71,042
9,704
225
319
2
—
546
4
—
—
—
4
— 32,522
— 3,725
6
—
13
13
13 36,266
— 4,137
142
—
—
—
5
5
4,284
5
74,393
1,258
57,949 11,237
339
225
—
— 75,651
— 69,186
564
—
2,562
— 2,562
2,562 147,963
132,567 12,834
20
103
—
—
123
20
167
1
—
188
13
10
—
—
23
14
—
—
—
14
67
280
1
—
348
7
38
—
—
45
12
111
1
—
124
7
9
—
—
16
7
—
—
—
7
33
158
1
—
192
40
450
17
—
507
51
1,374
62
—
1,487
13
39
38
—
90
1
—
—
—
1
—
—
—
8
8
—
—
—
2
2
26
49
38
8
121
15
—
—
2
17
105
1,863
117
—
172
— 2,143
118
—
1,358
— 1,358
3,791
1,358
2,085
6
36
5
—
47
11
169
18
—
198
1
2
1
—
4
—
—
—
—
—
—
—
—
402
402
—
—
—
859
859
—
—
—
8
8
—
—
—
—
—
13
74
5
402
494
23
280
19
859
1,181
8
11
1
8
28
7
—
—
—
7
—
18
—
207
24
—
— 1,269
1,269
249
51
365
25
1,269
1,710
NatWest Group Annual Report and Accounts 2020
208
0.03
0.56
0.65
2.68
— 20.43
—
0.05
2.48
— 47.06
47.06
0.06
—
—
1.52
— 20.00
47.06
0.25
0.30
—
—
—
0.29
0.09
0.67
0.08
—
0.29
0.04
0.22
—
—
0.14
0.05
0.30
0.55
—
0.21
0.94
—
—
—
—
—
— 50.00
50.00
0.49
1.52
5.07
12.89
—
—
—
— 44.23
44.23
4.68
1.45
1.70
9.62
—
—
—
— 44.92
44.92
1.82
1.79
1.92
6.32
—
—
—
— 52.09
52.09
2.04
0.31
—
—
50.00
0.34
0.20
2.72
5.63
44.23
2.25
0.08
0.38
5.56
44.92
1.36
0.10
0.61
4.06
52.09
1.66
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
0.02
0.26
0.44
0.63
— 50.00
—
0.04
0.73
— 61.54
61.54
0.02
—
0.30
—
— 16.67
61.54
0.08
0.17
—
—
—
0.16
0.04
0.27
0.44
—
0.14
—
—
—
—
—
—
—
—
—
—
1.43
1.84
7.08
—
—
—
— 49.53
49.53
1.94
0.17
—
—
—
0.16
0.07
0.53
4.43
49.53
1.16
Risk and capital management
Credit risk – Banking activities continued
Key points
Across the Wholesale portfolio, the asset quality band distribution
differed, reflecting the diverse nature of the sectors.
Asset quality deterioration, however, was observed across most
sectors as the impacts of COVID-19 affected customers’
operations and markets.
The level of asset quality deterioration was mitigated by
government support schemes in relation to COVID-19.
The increase in AQ10 exposure in property was largely due to
individually significant commercial real estate customers,
particularly in the retail sub-sector.
Within the Wholesale portfolio, customer credit grades were
reassessed as and when a request for financing was made, a
scheduled customer credit review was undertaken or a material
event specific to that customer occurred.
As previously noted, a request for support using one of the
government-backed COVID-19 support schemes would prompt
credit grades to be reassessed but was not, in itself, a reason for a
customer’s credit grade to be amended. For further details, refer to
the Impact of COVID-19 section.
ECL provisions coverage showed the expected trend with
increased coverage in the poorer asset quality bands, and also by
stage.
The relatively low provision coverage for Stage 3 loans in the
property sector reflected the secured nature of the exposures.
Credit risk – Trading activities
This section details the credit risk profile of NatWest Group’s trading activities.
Securities financing transactions and collateral
The table below shows securities funding transactions in NatWest Markets and Treasury. Balance sheet captions include balances held at all
classifications under IFRS 9.
2020
Gross
IFRS offset
Carrying value
Master netting arrangements
Securities collateral
Potential for offset not recognised under IFRS
Net
2019
Gross
IFRS offset
Carrying value
Master netting arrangements
Securities collateral
Potential for offset not recognised under IFRS
Net
Reverse repos
Of which:
can be offset
£m
80,025
(35,820)
44,205
Outside
netting
arrangements
£m
363
—
363
Repos
Of which:
can be offset
£m
64,793
(35,820)
28,973
Outside
netting
arrangements
£m
1,700
—
1,700
Total
£m
80,388
(35,820)
44,568
(929)
(43,204)
(44,133)
435
(929)
(43,204)
(44,133)
72
74,156
(39,247)
34,909
73,348
(39,247)
34,101
(562)
(33,178)
(33,740)
1,169
(562)
(33,178)
(33,740)
361
Total
£m
66,493
(35,820)
30,673
(929)
(28,044)
(28,973)
1,700
(929)
(28,044)
(28,973)
—
71,494
(39,247)
32,247
69,020
(39,247)
29,773
(562)
(29,211)
(29,773)
2,474
(562)
(29,211)
(29,773)
—
—
—
—
363
808
—
808
—
—
—
808
—
—
—
1,700
2,474
—
2,474
—
—
—
2,474
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
209
Risk and capital management
Credit risk – Trading activities continued
Derivatives
The table below shows derivatives by type of contract. The master netting agreements and collateral shown do not result in a net presentation
on the balance sheet under IFRS 9. A significant proportion (more than 90%) of the derivatives relate to trading activities in NatWest Markets.
The table also includes hedging derivatives in Treasury.
2020
2019
Gross exposure
IFRS offset
Carrying value
Of which:
Interest rate (1)
Interest rate swaps
Options purchased
Options written
Futures and forwards
Total
Exchange rate
Spot, forwards and futures
Currency swaps
Options purchased
Options written
Total
Credit
Equity and commodity
Carrying value
Counterparty mark-to-market netting
Cash collateral
Securities collateral
Net exposure
Of which outside netting arrangements
Banks (2)
Other financial institutions (3)
Corporate (4)
Government (5)
Net exposure
UK
Europe
US
RoW
Net exposure
Asset quality of uncollateralised derivative assets
AQ1-AQ4
AQ5-AQ8
AQ9-AQ10
Net exposure
GBP
£bn
Notional
EUR
£bn
USD
£bn
3,970
3,588
4,941
3,609
2,115
4,380
Total
£bn
Other
£bn
Assets
£m
Liabilities
£m
160,942 158,603
(11,724)
(10,913)
1,548 14,047 166,523 160,705 15,063 150,029 146,879
Liabilities
£m
177,330 172,245
(11,540)
(10,807)
Notional
£bn
Assets
£m
93,587
20,527
86,123
—
— 13,198
10
11
99,331
599 10,703 114,115 105,214 11,293 104,957
85,022
—
— 20,190
2
1
89,646
15,300
359
2
—
1,468
4
1
552
9
—
949
—
—
30,728
10,296
—
6,117
47,141
359
48
14,047 166,523 160,705 15,063 150,029 146,879
35,309
12,136
—
7,662
55,107
376
8
30,348
8,795
5,649
—
44,792
280
—
34,924
10,038
7,277
—
52,239
161
8
3,328
15
1
3,750
17
3
(137,086) (137,086)
(15,034)
(4,921)
3,664
631
(19,608)
(5,053)
4,776
905
(122,697) (122,697)
(17,296)
(1,276)
5,610
4,207
(18,685)
(4,292)
4,355
2,092
557
1,931
1,082
94
3,664
1,627
1,118
644
275
3,664
206
1,436
2,985
149
4,776
2,914
1,091
470
301
4,776
3,464
1,283
29
4,776
857
4,088
639
26
5,610
3,153
1,898
331
228
5,610
621
1,020
2,452
262
4,355
2,052
1,393
428
482
4,355
3,361
972
22
4,355
Notes:
(1) The notional amount of interest rate derivatives includes £7,390 billion (2019 – £7,090 billion) in respect of contracts cleared through central clearing
counterparties.
(2) Transactions with certain counterparties with whom NatWest Group has netting arrangements but collateral is not posted on a daily basis; certain transactions
with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions for example China where the collateral
agreements are not deemed to be legally enforceable.
(3) Transactions with securitisation vehicles and funds where collateral posting is contingent on NatWest Group’s external rating.
(4) Mainly large corporates with whom NatWest Group may have netting arrangements in place, but operational capability does not support collateral posting.
(5) Sovereigns and supranational entities with one-way collateral agreements in their favour.
NatWest Group Annual Report and Accounts 2020
210
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Trading activities continued
Derivatives: settlement basis and central counterparties
The table below shows the third party derivative notional and fair value by trading and settlement method.
2020
Interest rate
Exchange rate
Credit
Equity and commodity
Total
2019
Interest rate
Exchange rate
Credit
Equity and commodity
Total
Notional
Traded over the counter
Not settled
Settled
Traded on
recognised
by central
by central
exchanges counterparties counterparties
£bn
2,281
3,326
15
1
5,623
£bn
7,390
—
—
—
7,390
£bn
1,032
2
—
—
1,034
1,593
3
—
1
1,597
7,090
—
—
—
7,090
2,610
3,747
17
2
6,376
Asset
Liability
Traded on
Traded
recognised
over the
exchanges
counter
£m
£m
— 114,115
52,239
—
161
—
—
8
— 166,523
Traded on
Traded
recognised
over the
exchanges
counter
£m
£m
— 105,214
55,107
—
376
—
—
8
— 160,705
— 104,957
44,792
—
—
280
—
—
— 150,029
—
99,331
—
47,141
—
359
48
—
— 146,879
Total
£bn
10,703
3,328
15
1
14,047
11,293
3,750
17
3
15,063
Debt securities
The table below shows debt securities held at mandatory fair value through profit or loss by issuer as well as ratings based on the lowest of
Standard & Poor’s, Moody’s and Fitch. A significant proportion (more than 95%) of these positions are trading securities in NatWest Markets.
2020
AAA
AA to AA+
A to AA-
BBB- to A-
Non-investment grade
Unrated
Total
Short positions
2019
AAA
AA to AA+
A to AA-
BBB- to A-
Non-investment grade
Unrated
Total
Short positions
Central and local government
UK
£m
—
—
4,184
—
—
—
4,184
US
£m
—
5,149
—
—
—
—
5,149
Other
£m
3,114
3,651
1,358
8,277
36
—
16,436
Financial
institutions
£m
1,113
576
272
444
127
150
2,682
Corporate
£m
—
49
81
656
53
5
844
Total
£m
4,227
9,425
5,895
9,377
216
155
29,295
(5,704)
(1,123)
(18,135)
(1,761)
(56)
(26,779)
—
4,897
—
—
—
—
4,897
—
5,458
—
—
—
—
5,458
2,197
2,824
3,297
6,508
76
—
14,902
1,188
333
755
872
298
420
3,866
5
87
109
895
150
48
1,294
3,390
13,599
4,161
8,275
524
468
30,417
(4,340)
(1,392)
(13,749)
(1,620)
(86)
(21,187)
Note:
(1) The UK’s credit rating declined from AA to AA- as rated by Fitch during 2020. Moody’s and Standard & Poor’s ratings remain unchanged.
NatWest Group Annual Report and Accounts 2020
211
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Credit risk – Cross border exposure
Cross border exposures comprise both banking and trading activities, including reverse repurchase agreements. Exposures comprise loans and
advances, including finance leases and instalment credit receivables, and other monetary assets, such as debt securities. The geographical
breakdown is based on the country of domicile of the borrower or guarantor of ultimate risk. Cross border exposures include non-local currency
claims of overseas offices on local residents but exclude exposures to local residents in local currencies. The table shows cross border
exposures greater than 0.5% of NatWest Group’s total assets.
2020
Western Europe
Of which: France
Germany
Italy
Spain
United States
2019
Western Europe
Of which: France
Germany
Italy
Luxembourg
Netherlands
Spain
United States
Japan
Government
£m
23,651
5,098
4,913
4,985
2,980
12,430
21,646
3,097
6,597
3,757
4
971
2,410
14,441
2,722
Banks
£m
9,232
1,574
4,020
319
731
4,316
8,989
1,943
3,903
532
38
626
260
5,754
2,685
Other
£m
21,091
6,270
2,343
791
1,120
7,186
23,490
4,365
1,270
880
4,592
5,692
1,410
7,974
302
Total
£m
53,974
12,942
11,276
6,095
4,831
23,932
54,125
9,405
11,770
5,169
4,634
7,289
4,080
28,169
5,709
Short
positions
£m
18,756
2,465
3,833
3,583
3,773
1,239
14,370
2,497
2,371
3,642
2
541
2,493
1,483
12
Net of short
positions
£m
35,218
10,477
7,443
2,512
1,058
22,693
39,755
6,908
9,399
1,527
4,632
6,748
1,587
26,686
5,697
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
212
Liquidity
NatWest Group maintains a prudent approach to the definition of
liquidity resources. NatWest Group manages its liquidity to ensure it is
always available when and where required, taking into account
regulatory, legal and other constraints. Following ring-fencing
legislation, liquidity is no longer considered fungible across NatWest
Group. Principal liquidity portfolios are maintained in the UK Domestic
Liquidity Sub-Group (UK DoLSub) (primarily in NatWest Bank Plc),
UBI DAC, NatWest Markets Plc, RBS International Limited and NWM
N.V.. Some disclosures in this section where relevant are presented,
on a consolidated basis, for NatWest Group, the UK DoLSub and on a
solo basis for NatWest Markets Plc.
Liquidity resources are divided into primary and secondary liquidity as
follows:
Primary liquid assets include cash and balances at central banks,
Treasury bills and other high quality government and supranational
securities.
Secondary liquid assets are eligible as collateral for local central
bank liquidity facilities. These assets include own-issued
securitisations or whole loans that are retained on balance sheet
and pre-positioned with a central bank so that they may be
converted into additional sources of liquidity at very short notice.
Funding
NatWest Group maintains a diversified set of funding sources,
including customer deposits, wholesale deposits and term debt
issuance. NatWest Group also retains access to central bank funding
facilities.
For further details on capital constituents and the regulatory framework
covering capital, liquidity and funding requirements, please refer to the
NatWest Group Pillar 3 Report 2020 Capital, liquidity and funding section.
Risk and capital management
Capital, liquidity and funding risk
NatWest Group continually ensures a comprehensive approach is
taken to the management of capital, liquidity and funding, underpinned
by frameworks, risk appetite and policies, to manage and mitigate
capital, liquidity and funding risks. The framework ensures the tools
and capability are in place to facilitate the management and mitigation
of risk ensuring NatWest Group operates within its regulatory
requirements and risk appetite.
Definitions
Regulatory capital consists of reserves and instruments issued, have a
degree of permanency and are capable of absorbing losses. A number
of strict conditions set by regulators must be satisfied to be eligible as
capital.
Capital adequacy risk is the risk that there is or will be insufficient
capital and other loss-absorbing debt instruments to operate effectively
including meeting minimum regulatory requirements, operating within
Board approved risk appetite and supporting its strategic goals.
Liquidity consists of assets that can be readily converted to cash within
a short timeframe at a reliable value. Liquidity risk is the risk of being
unable to meet financial obligations as and when they fall due.
Funding consists of on-balance sheet liabilities that are used to
provide cash to finance assets. Funding risk is the risk of not
maintaining a diversified, stable and cost-effective funding base.
Liquidity and funding risks arise in a number of ways, including through
the maturity transformation role that banks perform. The risks are
dependent on factors such as:
Maturity profile;
Composition of sources and uses of funding;
The quality and size of the liquidity portfolio;
Wholesale market conditions; and
Depositor and investor behaviour.
Sources of risk
Capital
The eligibility of instruments and financial resources as regulatory
capital is laid down by applicable regulation. Capital is categorised
under two tiers (Tier 1 and Tier 2) according to the ability to absorb
losses, degree of permanency and the ranking of absorbing losses on
either a going or gone concern basis. There are three broad categories
of capital across these two tiers:
CET1 capital. CET1 capital must be perpetual and capable of
unrestricted and immediate use to cover risks or losses as soon as
these occur. This includes ordinary shares issued and retained
earnings.
Additional Tier 1 (AT1) capital. This is the second type of loss
absorbing capital and must be capable of absorbing losses on a
going concern basis. These instruments are either written down or
converted into CET1 capital when the CET1 ratio falls below a pre-
specified level.
Tier 2 capital. Tier 2 capital is NatWest Group’s supplementary
capital and provides loss absorption on a gone concern basis. Tier
2 capital absorbs losses after Tier 1 capital. It typically consists of
subordinated debt securities with a minimum maturity of five years.
Minimum requirement for own funds and eligible liabilities (MREL)
In addition to capital, other specific loss-absorbing instruments,
including senior notes issued by NatWest Group, may be used to
cover certain gone concern capital requirements which, is referred to
as MREL. Gone concern refers to the situation in which resources
must be available to enable an orderly resolution, in the event that the
Bank of England (BoE) deems that NatWest Group has failed or is
likely to fail.
NatWest Group Annual Report and Accounts 2020
213
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group
NatWest Holdings Group
Liquidity risk management
NatWest Group manages its liquidity risk taking into account
regulatory, legal and other constraints to ensure sufficient liquidity is
available where required to cover liquidity stresses. The principal
levels at which liquidity risk is managed are:
NatWest Markets Securities Inc.
RBS International Limited
NatWest Markets Plc
UK DoLSub
NWM N.V.
UBI DAC
The UK DoLSub is PRA regulated and comprises NatWest Group’s
four licensed deposit-taking UK banks: National Westminster Bank Plc
(NWB Plc), The Royal Bank of Scotland plc (RBS plc), Coutts &
Company and Ulster Bank Limited.
NatWest Group categorises its liquidity portfolio, including its locally
managed liquidity portfolios, into primary and secondary liquid assets.
The size of the liquidity portfolios are determined by referencing
NatWest Group’s liquidity risk appetite. NatWest Group retains a
prudent approach to setting the composition of the liquidity portfolios,
which is subject to internal policies applicable to all entities and limits
over quality of counterparty, maturity mix and currency mix.
RBS International Limited, NWM N.V. and UBI DAC hold locally
managed portfolios that comply with local regulations that may differ
from PRA rules.
The liquidity value of the portfolio is determined by taking current
market prices and applying a discount or haircut, to give a liquidity
value that represents the amount of cash that can be generated by the
asset.
Funding risk management
NatWest Group manages funding risk through a comprehensive
framework which measures and monitors the funding risk on the
balance sheet including quantitative and qualitative analysis of the
behavioural aspects of its assets and liabilities as well as the funding
concentration.
Risk and capital management
Capital, liquidity and funding risk continued
Capital management
Capital management ensures that there is sufficient capital and other
loss-absorbing instruments to operate effectively including meeting
minimum regulatory requirements, operating within Board-approved
risk appetite, maintaining its credit rating and supporting its strategic
goals.
Capital management is critical in supporting the businesses and is
enacted through an end-to-end framework across businesses and the
legal entities. Capital is managed within the organisation at the
following levels; NatWest Group consolidated, NWH Group sub
consolidated, NatWest Markets Plc, NatWest Markets N.V. and RBS
International Limited. The subsidiaries within NWH Group are
governed by the same principles, processes and management as
NatWest Group. Note that although the aforementioned entities are
regulated in line with Basel III principles, local implementation of the
framework differs across geographies.
Capital planning is integrated into NatWest Group’s wider annual
budgeting process and is assessed and updated at least monthly.
Regular returns are submitted to the PRA which include a two-year
rolling forecast view. Other elements of capital management, including
risk appetite and stress testing, are set out on pages 160 and 161.
Produce
capital
plans
Assess
capital
adequacy
Inform
capital
actions
Capital plans are produced for NatWest Group, its
key operating entities and its businesses over a
five year planning horizon under expected and
stress conditions. Stressed capital plans are
produced to support internal stress testing in the
ICAAP for regulatory purposes.
Shorter term forecasts are developed frequently in
response to actual performance, changes in
internal and external business environment and to
manage risks and opportunities.
Capital plans are developed to maintain capital of
sufficient quantity and quality to support NatWest
Group’s business, its subsidiaries and strategic
plans over the planning horizon within approved
risk appetite, as determined via stress testing, and
minimum regulatory requirements.
Capital resources and capital requirements are
assessed across a defined planning horizon.
Impact assessment captures input from across
NatWest Group including from businesses.
Capital planning informs potential capital actions
including buy backs, redemptions, dividends and
new issuance to external investors or via internal
transactions.
Decisions on capital actions will be influenced by
strategic and regulatory requirements, risk
appetite, costs and prevailing market conditions.
As part of capital planning, NatWest Group will
monitor its portfolio of external capital securities
and assess the optimal blend and most cost
effective means of financing.
Capital planning is one of the tools that NatWest Group uses to
monitor and manage capital risk on a going and gone concern basis,
including the risk of excessive leverage.
NatWest Group Annual Report and Accounts 2020
214
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Capital, liquidity and funding risk continued
Relief measures
The economic impact of COVID-19 during the year was significant.
While liquidity, capital and funding were closely monitored throughout,
NatWest Group benefited from its strong positions – particularly in
relation to CET1 – going into the crisis. Prudent risk management
continues to be important as the full economic effects of the global
pandemic unfold.
In response to COVID-19, a number of relief measures to alleviate the
financial stability impact have been announced and recommended by
regulatory and supervisory bodies. One significant announcement in
the year was on 26 June when the European Parliament passed an
amended regulation to the CRR in response to the COVID-19
pandemic (“the CRR COVID-19 amendment”); NatWest Group has
applied a number of the CRR amendments for FY 2020 reporting. The
impact on capital and leverage of the CRR amendment and other relief
measures are set out below.
IFRS 9 Transition – NatWest Group has elected to take advantage of
the transitional regulatory capital rules in respect of expected credit
losses following the adoption of IFRS 9; it had previously had a
negligible impact up to Q4 2019. The CRR COVID-19 amendment
now requires a full CET1 addback for the movement in stage 1 and
stage 2 ECL from 1 January 2020 for the next two years. The IFRS 9
transitional arrangement impact on NatWest Group CET1 regulatory
capital at 31 December 2020 is £1.7 billion.
UK Leverage exposure – The Prudential Regulation Authority (PRA)
announced the ability for firms to apply for a modification by consent
to permit the netting of regular-way purchase and sales settlement
balances. The PRA also offered a further modification that gave an
exclusion from the UK Leverage Exposure for Bounce Back Loans
(BBL) and other 100% guaranteed government COVID-19 lending
schemes. NatWest Group has received permission to apply these
and it has reduced the UK leverage exposure by c.£2.3 billion and
£8.3 billion respectively.
CRR Leverage exposure – The CRR COVID-19 amendment
accelerated a change in CRR2 to allow the netting of regular-way
purchase and sales settlement balances. NatWest Group has applied
this, and it has reduced the CRR leverage exposure by c.£2.3 billion.
Infrastructure and SME RWA supporting factors – The CRR COVID-19
amendment allowed an acceleration of the planned changes to the
SME supporting factor and the introduction of an Infrastructure
supporting factor. NatWest Group has implemented these beneficial
changes to supporting factors which have reduced RWAs by c.£1 billion
for SMEs and c.£0.9 billion for Infrastructure.
Prudential Valuation Adjustment (PVA) – The European Commission
amended the prudent valuation Regulatory Technical Standard such
that, due to the exceptional levels of market volatility, the aggregation
factor was increased from 50% to 66% until 31 December 2020
inclusive. This has reduced NatWest Group’s PVA deduction by c.£120
million.
Market Risk Value-at-risk (VaR) model capital multiplier – the CRR
COVID-19 amendment allowed for back-testing exceptions due to the
exceptional levels of market volatility caused by COVID-19 to be
excluded from the capital multiplier. This approach resulted in c.£1.4
billion benefit.
Capital buffers – Many countries announced reductions in their
countercyclical capital buffer rates in response to COVID-19. Most
notably for NatWest Group, the Financial Policy Committee reduced the
UK rate from 1% to 0% effective from 11 March 2020. The CBI also
announced a reduction of the Republic of Ireland rate from 1% to 0%
effective from 1 April 2020.
Software Assets – The CRR COVID-19 amendment accelerated the
change to the regulatory treatment of software assets so this revision
came in prior to the year end. The change introduces the concept of
prudential amortisation for software assets so that unamortised
software is no longer deducted from CET1. By applying this
amendment the impact to NatWest Group is an increase of 23 bps to
CET1 and an 8 bps increase to the UK leverage ratio.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
215
2020
2019
Risk and capital management
Capital, liquidity and funding risk continued
Key points
CET1 Ratio
2020 18.5%
2019 16.2%
LAC
2020
£63.9bn
2019
£59.7bn
RWA
2020
£170.3bn
2019
£179.2bn
Leverage
2020
5.2%
2019
5.1%
UK Leverage
2020
6.4%
2019
5.8%
Liquidity portfolio
2020
£262.3bn
2019
£199.4bn
Liquidity Coverage Ratio
2020
165%
2019
152%
NSFR
2020
151%
2019
141%
Increase of 230 bps, of which 140 bps is due to an increase in CET1 capital and 90 bps
due to a decrease in Risk Weighted Assets. Key drivers in the CET1 capital
increase; cancellation of 2019 dividends and associated pension contribution offset by
the inclusion of the 2020 foreseeable dividends and charges (40 bps), reduction in the
regulatory intangibles deduction due to implementation of CRR2 amended Article 36 for
the prudential treatment of software assets (23 bps), and adoption of IFRS 9 transitional
arrangements on expected credit losses (100 bps) offsetting associated impairment
charges through the attributable loss of £753 million (-40 bps).
Loss absorbing capital increased by £4.2 billion to £63.9 billion primarily due to an
increase in CET1 (explained above), new issuance of $1.6 billion Senior debt, AT1
issuances of $1.5 billion and £1.0 billion, and Tier 2 issuances of £1.0 billion and $0.85
billion. These were partially offset by the redemption of a $2.0 billion AT1 instrument and
a $0.5 billion partial redemption of a Tier 2 instrument, FX movements and Tier 2
regulatory amortisation.
RWAs reduced by £8.9 billion in 2020, reflecting reductions in market risk (£3.6 billion),
counterparty credit risk (£3.5 billion) and credit risk RWAs (£1.1 billion) mainly in NatWest
Markets as the business seeks to reduce RWAs through capital optimisation and exit
activity. RWAs also decreased by c.£1.9 billion due to the CRR COVID-19 amendment
for the SME & Infrastructure supporting factors, and NPL de-recognitions in Ulster Bank
ROI. The acquisition of prime UK mortgages from Metro Bank resulted in a £1.2 billion
increase in credit risk RWAs.
CRR leverage ratio increased by c.10 basis points driven by a £3.3 billion increase in Tier
1 capital which is partially offset by a £59.2 billion increase in the leverage exposure
driven by balance sheet exposures.
The UK leverage ratio has increased by c.60 basis points driven by a £3.3 billion increase
in Tier 1 capital.
The liquidity portfolio increased by £63 billion in 2020 to £262 billion, with primary liquidity
increasing by £45 billion to £170 billion. The increase in primary liquidity is driven
primarily by an increased customer surplus in NatWest Holdings with smaller increases in
other Group entities. The increase in secondary liquidity is driven by collateral pool top-
ups along with unencumbrance of assets following Term Funding Scheme (TFS)
repayments during the year.
The Liquidity Coverage Ratio (LCR) increased by 13% during the year to 165% driven by
an increase in the liquidity portfolio offset with a lower level of increased net
outflows. The increased liquidity portfolio was primarily driven by significant growth in
customer deposits in NatWest Holdings which outstripped growth in customer lending
during the year.
The net stable funding ratio (NSFR) for FY 2020 was 151% compared to 141% in prior
year. The increase is mainly due to deposits growth.
NatWest Group Annual Report and Accounts 2020
216
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Capital, liquidity and funding risk continued
Minimum requirements
Maximum Distributable Amount (MDA) and Minimum Capital Requirements
NatWest Group is subject to minimum capital requirements relative to RWAs. The table below summarises the minimum capital requirements
(the sum of Pillar 1 and Pillar 2A), and the additional capital buffers which are held in excess of the regulatory minimum requirements and are
usable in stress.
Where the CET1 ratio falls below the sum of the minimum capital and the combined buffer requirement, there is a subsequent automatic
restriction on the amount available to service discretionary payments, known as the MDA. Note that different capital requirements apply to
individual legal entities or sub-groups and that the table shown does not reflect any incremental PRA buffer requirements, which are not
disclosable.
The current capital position provides significant headroom above both our minimum requirements and our MDA threshold requirements.
Type
Pillar 1 requirements
Pillar 2A requirements
Minimum Capital Requirements
Capital conservation buffer
Countercyclical capital buffer (1)
G-SIB buffer (2)
MDA Threshold (3)
Subtotal
Capital ratios at 31 December 2020
Headroom (4)
CET1
4.5%
1.9%
6.4%
2.5%
—
—
8.9%
8.9%
18.5%
9.6%
Total Tier 1
6.0%
2.6%
8.6%
2.5%
—
—
n/a
11.1%
21.4%
10.3%
Total capital
8.0%
3.4%
11.4%
2.5%
—
—
n/a
13.9%
24.5%
10.6%
Notes:
(1) Many countries announced reductions in their countercyclical capital buffer rates in response to COVID-19. Most notably for NatWest Group, the Financial Policy
Committee reduced the UK rate from 1% to 0% effective from 11 March 2020. The CBI also announced a reduction of the Republic of Ireland rate from 1% to 0%
effective from 1 April 2020.
In November 2018, the Financial Stability Board announced that NatWest Group is no longer a G-SIB. From 1 January 2020, NatWest Group was released from
this global buffer requirement.
Pillar 2A requirements for NatWest Group are set on a nominal capital basis which result in an implied 8.9% MDA.
The headroom does not reflect excess distributable capital and may vary over time.
(3)
(4)
(2)
Leverage ratios
The table below summarises the minimum ratios of capital to leverage exposure under the binding PRA UK leverage framework applicable for
NatWest Group.
Type
Minimum ratio
Countercyclical leverage ratio buffer (1)
Total
CET1
2.4375%
—
2.4375%
Total Tier 1
3.2500%
—
3.2500%
Notes:
(1)
(2)
The countercyclical leverage ratio buffer is set at 35% of NatWest Group’s CCyB. As noted above the UK CCyB decreased from 1% to 0% on 11 March 2020 in
response to COVID-19. Foreign exposures may be subject to different CCyB rates depending on the rate set in those jurisdictions.
Following the joint announcement of UK Treasury, PRA and FCA on 16 November 2020, we expect the PRA to consult on the application of leverage ratios to
individual legal entities and Groups during 2021.
Liquidity and funding ratios
The table below summarises the minimum requirements for key liquidity and funding metrics, under the relevant legislative framework.
Type
Liquidity coverage ratio (LCR)
Net stable funding ratio (NSFR) (1)
100%
—
Note:
(1) NSFR reported in line with CRR2 regulations finalised in June 2019. Following the joint announcement of UK Treasury, PRA and FCA on 16 November 2020 to
postpone the future EU CRR2 element of the Basel 3 package, we understand the PRA is due to consult on a binding Net Stable Funding ratio (NSFR)
requirement to be introduced from January 2022.
NatWest Group Annual Report and Accounts 2020
217
i
i
R
R
s
s
k
k
a
a
n
n
d
d
c
c
a
a
p
p
i
i
t
t
a
a
l
l
m
m
a
a
n
n
a
a
g
g
e
e
m
m
e
e
n
n
t
t
Risk and capital management
Capital, liquidity and funding risk continued
Measurement
Capital, risk-weighted assets and leverage: Key metrics
The table below sets out the key capital and leverage ratios. Refer to Note 25 to the consolidated financial statements for a more detailed
breakdown of regulatory capital.
CET1
Tier1
Total
RWAs
Credit risk
Counterparty credit risk
Market risk
Operational risk
Total RWAs
Capital adequacy ratios
CET1
Tier 1
Total
2020
2019
End point
PRA transitional
End point PRA transitional
CRR basis (1)
basis
CRR basis (1)
£m
31,447
36,430
41,685
£m
129,914
9,104
9,362
21,930
170,310
%
18.5
21.4
24.5
£m
31,447
37,260
43,733
£m
129,914
9,104
9,362
21,930
170,310
%
18.5
21.9
25.7
£m
29,054
33,105
38,005
£m
131,012
12,631
12,930
22,599
179,172
%
16.2
18.5
21.2
basis
£m
29,054
34,611
40,823
£m
131,012
12,631
12,930
22,599
179,172
%
16.2
19.3
22.8
Leverage ratios
Tier 1 capital
CRR leverage exposure
CRR leverage ratio (%)
UK Average Tier 1 capital (2)
UK Average leverage exposure (2)
UK Average leverage ratio (%) (2)
UK leverage ratio (%) (3)
Notes:
(1) CRR as implemented by the Prudential Regulation Authority in the UK. End point CRR basis includes the IFRS 9 transitional uplift to capital of £1.7 billion and
£m
36,430
703,093
5.2%
36,397
576,906
6.3%
6.4%
£m
37,260
703,093
5.3%
37,231
576,906
6.5%
6.5%
£m
33,105
643,874
5.1%
33,832
611,588
5.5%
5.8%
£m
34,611
643,874
5.4%
35,350
611,588
5.8%
6.1%
£0.2 billion uplift to RWAs. Excluding this adjustment, the CET1 ratio would be 17.5% and CRR leverage ratio would be 4.9%.
(2) Based on the daily average of on-balance sheet items and three month-end average of off-balance sheet items.
(3) Presented on CRR end point Tier 1 capital (including IFRS 9 transitional adjustment). The UK leverage ratio excludes central bank claims from the leverage
exposure where deposits held are denominated in the same currency and of contractual maturity that is equal or longer than that of the central bank claims.
Excluding the IFRS 9 transitional adjustment, the UK leverage ratio would be 6.1%.
Capital flow statement
The table below analyses the movement in CRR CET1, AT1 and Tier 2 capital for the year.
At 1 January 2020
Attributable loss for the period
Own credit
Share capital and reserve movements in respect of employee share schemes
Foreign exchange reserve
FVOCI reserve
Goodwill and intangibles deduction
Deferred tax assets
Prudential valuation adjustments
Expected loss less impairment
New issues of capital instruments
Redemption of capital instruments
Net dated subordinated debt instruments
Foreign exchange movements
Foreseeable ordinary and special dividends
Foreseeable charges
Adjustment under IFRS 9 transitional arrangements
Other movements
At 31 December 2020
CET1
£m
29,054
(753)
117
63
265
222
440
(3)
145
167
(355)
604
99
1,747
(365)
31,447
AT1
£m
4,051
Tier 2
£m
4,900
2,209
(1,277)
4,983
1,617
(751)
(688)
(223)
400
5,255
Total
£m
38,005
(753)
117
63
265
222
440
(3)
145
167
3,826
(2,028)
(688)
(578)
604
99
1,747
35
41,685
Key points
NatWest Group has elected to take advantage of the transitional
regulatory capital rules in respect of expected credit losses
following the adoption of IFRS 9, it had previously had a negligible
impact up to Q4 2019. The CRR COVID-19 amendment now
requires a full CET1 addback for the movement in stage 1 and
stage 2 ECL from 1 January 2020 for the next two years. The IFRS
9 transitional arrangement impact on NatWest Group CET1
regulatory capital at 31 December 2020 is £1.7 billion.
Cancellation of 2019 dividends and associated pension contribution
offset by the inclusion of the 2020 foreseeable dividends and
charges resulted in an increase in CET1 of £0.7 billion.
The implementation of CRR2 amended Article 36 for the prudential
treatment of software assets has resulted in an increase to CET1 of
£0.5 billion.
Foreign exchange movements include a £0.4 billion charge, in
relation to a $2 billion AT1 redemption announcement on 28 June
2020.
NatWest Group Annual Report and Accounts 2020
218
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Capital, liquidity and funding risk continued
Risk-weighted assets
The table below analyses the movement in RWAs during the year, by key drivers.
At 1 January 2020
Foreign exchange movement
Business movements
Risk parameter changes (1)
Methodology changes (2)
Model updates
Other movements (3)
Acquisitions and disposals (4)
At 31 December 2020
Credit risk
£bn
131.0
1.0
(3.6)
(0.2)
(1.0)
1.5
—
1.2
129.9
Counterparty
credit risk
£bn
12.6
0.1
(2.6)
0.2
(0.1)
—
(1.1)
—
9.1
Market risk Operational risk
£bn
22.6
—
(0.7)
—
—
—
—
—
21.9
£bn
13.0
—
(3.4)
—
—
(0.2)
—
—
9.4
The table below analyses the movement in RWAs by segment during the year.
Total RWAs
At 1 January 2020
Foreign exchange movement
Business movements
Risk parameter changes (1)
Methodology changes (2)
Model updates
Other movements (3)
Acquisitions and disposals (4)
At 31 December 2020
Credit risk
Counterparty credit risk
Market risk
Operational risk
Total RWAs
Retail
Banking
£bn
37.8
—
(0.1)
(2.2)
—
—
—
1.2
36.7
29.2
0.1
—
7.4
36.7
Ulster
Bank RoI
£bn
13.0
0.6
(1.1)
(0.8)
(0.1)
0.2
—
—
11.8
10.7
—
0.1
1.0
11.8
Commercial
Banking
£bn
72.5
0.2
0.1
2.4
(1.9)
1.3
0.5
—
75.1
66.3
0.2
0.1
8.5
75.1
Private
Banking
£bn
10.1
—
0.9
—
(0.1)
—
—
—
10.9
9.6
0.1
—
1.2
10.9
RBS
International
£bn
6.5
—
0.8
0.2
—
—
—
—
7.5
NatWest Central items
& other
Markets
£bn
£bn
1.4
37.9
—
0.3
(0.8)
(10.1)
—
0.4
0.8
0.2
—
(0.2)
—
(1.6)
—
—
1.4
26.9
6.5
—
—
1.0
7.5
6.2
8.7
9.2
2.8
26.9
1.4
—
—
—
1.4
Total
£bn
179.2
1.1
(10.3)
—
(1.1)
1.3
(1.1)
1.2
170.3
Total
£bn
179.2
1.1
(10.3)
—
(1.1)
1.3
(1.1)
1.2
170.3
129.9
9.1
9.4
21.9
170.3
Notes:
(1) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well
as internal ratings based model changes relating to counterparty credit risk in line with European Banking Authority Pillar 3 Guidelines.
(2) Methodology changes reflect the impact of the following:
(a) The implementation of the new securitisations framework from 1 January 2020; all positions have moved to the new framework.
(b) The RWA reductions due to the CRR COVID-19 amendment which allowed an acceleration of the planned changes to the SME supporting factor and the
introduction of an Infrastructure supporting factor.
(c) Increases in RWAs of £0.5 billion in Q4 2020 due to the implementation of the CRR2 amended Article 36 for the prudential treatment of software assets.
(3) Other movements include:
(a) Hedging activity on counterparty credit risk in NatWest Markets.
(b) A transfer of assets from NatWest Markets to Commercial Banking.
(4) Acquisitions & Disposals - reflects the increase in credit risk RWAs following the acquisition of prime UK mortgages from Metro Bank.
Key point
Total RWAs decreased by £8.9 billion during the period:
o The £3.6 billion decrease in market risk RWAs was mainly driven by a decrease in RNIV based RWAs due to risk reduction activity.
o Counterparty credit risk RWAs reduced by £3.5 billion mainly reflecting trade novations and hedging activity in NatWest Markets.
o The decrease in credit risk RWAs of £1.1 billion reflected a reduction in exposures within NatWest Markets and Ulster Bank ROI
franchises, which was partly offset by increases in Commercial Banking due to deterioration of risk parameters and model updates.
o Operational risk RWAs decreased by £0.7 billion following the annual recalculation.
NatWest Group Annual Report and Accounts 2020
219
i
i
R
R
s
s
k
k
a
a
n
n
d
d
c
c
a
a
p
p
i
i
t
t
a
a
l
l
m
m
a
a
n
n
a
a
g
g
e
e
m
m
e
e
n
n
t
t
Risk and capital management
Capital, liquidity and funding risk continued
Credit risk exposure at default (EAD) and risk-weighted assets (RWAs)
The table below analyses credit risk RWAs and EADs, by on and off balance sheet.
31 December 2020
EAD
RWAs
On balance sheet
Off balance sheet
Total
On balance sheet
Off balance sheet
Total
31 December 2019
EAD
RWAs
On balance sheet
Off balance sheet
Total
On balance sheet
Off balance sheet
Total
Leverage exposure
Retail
Ulster
Commercial
Banking
Bank RoI
Banking
Private
Banking
RBS
International
NatWest
Markets
Central items
& other
£bn
254.7
28.3
283.0
26.7
2.5
29.2
221.8
30.2
252.0
27.1
3.1
30.2
£bn
27.4
2.2
29.6
9.6
1.1
10.7
26.0
2.2
28.2
10.8
1.1
11.9
£bn
151.4
29.3
180.7
52.5
13.8
66.3
131.4
27.2
158.6
50.8
12.5
63.3
£bn
23.7
0.3
24.0
9.4
0.2
9.6
20.3
0.3
20.6
8.7
0.2
8.9
£bn
34.0
5.1
39.1
5.1
1.4
6.5
31.7
3.3
35.0
4.7
1.0
5.7
£bn
33.4
5.5
38.9
4.1
2.1
6.2
35.4
7.5
42.9
6.4
3.2
9.6
£bn
0.9
0.1
1.0
1.4
—
1.4
0.7
0.4
1.1
1.3
0.1
1.4
Total
£bn
525.5
70.8
596.3
108.8
21.1
129.9
467.3
71.1
538.4
109.8
21.2
131.0
Cash and balances at central banks*
Trading assets
Derivatives
Other financial assets*
Other assets
Total assets
Derivatives
- netting and variation margin
- potential future exposures
Securities financing transactions gross up
Undrawn commitments (analysis below)
Regulatory deductions and other adjustments
CRR Leverage exposure
Claims on central banks
Exclusion of bounce back loans
UK leverage exposure (2)
End-point basis (1)
2020
£m
124,489
68,990
166,523
422,647
16,842
799,491
(172,658)
38,171
1,179
45,853
(8,943)
703,093
(122,252)
(8,283)
572,558
2019
£m
80,993
76,745
150,029
395,953
19,319
723,039
(157,778)
43,004
2,224
42,363
(8,978)
643,874
(73,544)
—
570,330
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
Notes:
(1) Based on end point CRR Tier 1 leverage exposure under the CRR Delegated Act.
(2) The UK leverage ratio excludes central bank claims from the leverage exposure where deposits held are denominated in the same currency and of contractual
maturity that is equal or longer than that of the central bank claims.
Liquidity key metrics
The table below sets out the key liquidity and related metrics monitored by NatWest Group.
Liquidity coverage ratio (1)
Stressed outflow coverage (2)
Net stable funding ratio (3)
2020
NatWest Group
165%
183%
151%
2019
UK DoLSub
152%
168%
144%
NatWest Group
152%
149%
141%
UK DoLSub
145%
134%
137%
Notes:
(1) The published LCR excludes Pillar 2 add-ons. NatWest Group calculates the LCR using its own interpretations of the EU LCR Delegated Act, which may
change over time and may not be fully comparable with those of other financial institutions.
(2) NatWest Group’s stressed outflow coverage (SOC) is an internal measure calculated by reference to liquid assets as a percentage of net stressed contractual
and behavioural outflows over three months under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination
of both as per ILAAP. This assessment is performed in accordance with PRA guidance.
(3) Following the joint announcement of UK Treasury, PRA and FCA on 16 November 2020 to postpone the future EU CRR2 element of the Basel 3 package, we
understand the PRA is due to consult on a binding Net Stable Funding ratio (NSFR) requirement to be introduced from January 2022.
NatWest Group Annual Report and Accounts 2020
220
i
i
R
R
s
s
k
k
a
a
n
n
d
d
c
c
a
a
p
p
i
i
t
t
a
a
l
l
m
m
a
a
n
n
a
a
g
g
e
e
m
m
e
e
n
n
t
t
Risk and capital management
Capital, liquidity and funding risk continued
Weighted undrawn commitments
The table below provides a breakdown of weighted undrawn commitments.
Unconditionally cancellable credit cards
Other unconditionally cancellable items
Unconditionally cancellable items (1)
Undrawn commitments <1 year which may not be cancelled
Other off-balance sheet items with 20% credit conversion factor (CCF)
Items with a 20% CCF
Revolving credit risk facilities
Term loans
Mortgages
Other undrawn commitments >1 year which may not be cancelled & off-balance sheet
Items with a 50% CCF
Items with a 100% CCF
Total
Note:
(1) Based on a 10% CCF.
2020
£bn
1.8
3.2
5.0
1.9
0.4
2.3
28.4
3.6
—
1.2
33.2
5.4
45.9
2019
£bn
2.0
3.5
5.5
1.7
0.4
2.1
25.8
3.1
0.1
1.5
30.5
4.4
42.5
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
221
Risk and capital management
Capital, liquidity and funding risk continued
Loss-absorbing capital
The following table illustrates the components of estimated loss-absorbing capital (LAC) in NatWest Group plc and operating subsidiaries and
includes external issuances only. The table is prepared on a transitional basis, including the benefit of regulatory capital instruments issued from
operating companies, to the extent they meet MREL criteria.
The roll-off profile relating to senior debt and subordinated debt instruments is set out on the next page.
CET1 capital (4)
Tier 1 capital: end point CRR compliant AT1
of which: NatWest Group plc (holdco)
of which: NatWest Group plc operating
operating subsidiaries (opcos)
Tier 1 capital: end point CRR non compliant
of which: holdco
of which: opcos
Tier 2 capital: end point CRR compliant
of which: holdco
of which: opcos
Tier 2 capital: end point CRR non compliant
of which: holdco
of which: opcos
Senior unsecured debt securities issued by:
NatWest Group plc holdco (7)
NatWest Group plc opcos
Tier 2 capital:
Other regulatory adjustments
Total
RWAs
UK leverage exposure
LAC as a ratio of RWAs
LAC as a ratio of UK leverage exposure
2020
Balance
Par
value (1)
£bn
31.4
sheet Regulatory
value (2)
value
£bn
£bn
31.4
31.4
LAC
value (3)
£bn
31.4
Par
value (1)
£bn
29.1
2019
Balance
sheet
value
£bn
29.1
Regulatory
value (2)
£bn
29.1
LAC
value (3)
£bn
29.1
5.0
—
5.0
0.7
0.1
0.8
6.9
0.4
7.3
0.1
1.6
1.7
19.6
20.9
40.5
—
—
5.0
—
5.0
0.7
0.1
0.8
7.2
0.4
7.6
0.1
1.9
2.0
20.9
21.5
42.4
—
—
5.0
—
5.0
0.7
0.1
0.8
4.8
0.1
4.9
0.1
1.1
1.2
—
—
—
0.4
0.4
5.0
—
5.0
0.5
0.1
0.6
5.7
0.1
5.8
0.1
1.0
1.1
19.6
—
19.6
0.4
0.4
4.0
—
4.0
1.4
0.1
1.5
6.2
0.5
6.7
0.1
1.6
1.7
18.6
21.1
39.7
—
—
4.0
—
4.0
1.6
0.1
1.7
6.4
0.5
6.9
0.1
1.8
1.9
19.2
20.7
39.9
—
—
4.0
—
4.0
1.4
0.1
1.5
4.8
0.1
4.9
0.1
1.2
1.3
—
—
—
—
—
4.0
—
4.0
0.5
0.1
0.6
4.7
0.4
5.1
0.1
1.6
1.7
19.2
—
19.2
—
—
86.7
89.2
43.7
63.9
82.7
83.5
40.8
59.7
170.3
572.6
37.5%
11.2%
179.2
570.3
33.3%
10.5%
Notes:
(1) Par value reflects the nominal value of securities issued.
(2) Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation; to the extent they meet the current MREL
criteria.
(3) LAC value reflects NatWest Group’s interpretation of the Bank of England’s approach to setting a minimum requirement for own funds and eligible liabilities
(MREL), published in June 2018. MREL policy and requirements remain subject to further potential development, as such NatWest Group’s estimated position
remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating
company senior debt, and other instruments that do not meet the MREL criteria. The LAC calculation includes Tier 1 and Tier 2 securities before the application
of any regulatory caps or adjustments.
(4) Corresponding shareholders’ equity was £43.9 billion (2019 - £43.5 billion).
(5) Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.
(6) NatWest Group is no longer recognised as a G-SII effective from 1 January 2020 and is therefore not subject to the CRR MREL requirement as of this date,
which references CRR 2 leverage exposure. To aid comparison, the leverage exposure, and resulting ratio is disclosed according to the BoE leverage
framework for all time periods.
(7) LAC value of senior unsecured debt securities issued by NatWest Group plc reflects par value for 31 December 2020 vs balance sheet value for 31 December
2019.
NatWest Group Annual Report and Accounts 2020
222
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Capital, liquidity and funding risk continued
Loss-absorbing capital
The following table illustrates the components of the stock of outstanding issuance in NatWest Group and its operating subsidiaries including
external and Internal issuances.
Tier 1 (inclusive of AT1)
Tier 1 (inclusive of AT1)
Externally issued
Internally issued
Tier 2
Tier 2
Externally issued
Internally issued
Senior unsecured
Senior unsecured
Externally issued
Internally issued
Total outstanding issuance
NatWest
NatWest
Holdings
NatWest
NWM
RBS
Markets
Securities International
Group plc
Limited
NWB Plc
RBS plc
UBI DAC
NWM Plc
£bn
5.7
—
5.7
7.3
—
7.3
20.9
—
20.9
33.9
£bn
—
3.7
3.7
—
4.9
4.9
—
9.0
9.0
17.6
£bn
0.1
2.4
2.5
1.1
3.3
4.4
—
3.9
3.9
10.8
£bn
—
1.0
1.0
—
1.5
1.5
—
0.4
0.4
2.9
£bn
—
—
—
0.1
0.5
0.6
—
0.5
0.5
1.1
£bn
—
1.1
1.1
0.5
1.5
2.0
—
5.2
5.2
8.3
N.V.
£bn
—
0.2
0.2
0.6
0.1
0.7
—
—
—
0.9
Inc.
£bn
—
—
—
—
0.3
0.3
—
—
—
0.3
Limited
£bn
—
0.3
0.3
—
—
—
—
—
—
0.3
Notes:
(1) The balances are the IFRS balance sheet carrying amounts, which may differ from the amount which the instrument contributes to regulatory capital. Regulatory
balances exclude, for example, issuance costs and fair value movements, while dated capital is required to be amortised on a straight-line basis over the final
five years of maturity.
(2) Balance sheet amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.
(3)
Internal issuance for NWB Plc, RBS plc and UBI DAC represents AT1, Tier 2 or Senior unsecured issuance to NatWest Holdings Limited and for NWM N.V. and
NWM SI to NWM Plc.
(4) Senior unsecured debt category does not include CP, CD and short term/medium term notes issued from NatWest Group operating subsidiaries.
(5) Tier 1 (inclusive of AT1) category does not include CET1 numbers.
Roll-off profile
The following table illustrates the roll-off profile and weighted average spreads of NatWest Group’s major wholesale funding programmes.
As at and
for year ended
31 December 2020
H1 2021
H2 2021
Roll-off profile
2022
2023
2024 & 2025
2026 & later
Senior debt roll-off profile (1)
NatWest Group plc
- amount (£m)
- weighted average rate spread (bps)
NWM Plc
- amount (£m)
- weighted average rate spread (bps)
NatWest Bank Plc
- amount (£m)
- weighted average rate spread (bps)
NWM N.V.
- amount (£m)
- weighted average rate spread (bps)
NWM S.I.
- amount (£m)
- weighted average rate spread (bps)
RBSI
- amount (£m)
- weighted average rate spread (bps)
Securitisation
- amount (£m)
- weighted average rate spread (bps)
Covered bonds
- amount (£m)
- weighted average rate spread (bps)
Total notes issued - amount (£m)
Weighted average rate spread (bps)
Subordinated debt instruments roll-off profile (2)
NatWest Group plc (£m)
NWM Plc (£m)
NatWest Bank Plc (£m)
NWM N.V. (£m)
UBI DAC (£m)
Total (£m)
20,881
183
16,260
100
3,292
17
1,180
66
232
130
540
11
1,017
12
3,020
127
46,422
128
7,283
517
1,097
588
77
9,562
—
—
3,953
68
2,667
15
581
70
—
—
409
7
—
—
—
—
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
—
—
2,292
65
7
224
3,013
87
7,011
225
1,761
139
4,932
134
4,310
146
8,931
175
930
117
625
25
599
62
—
—
131
23
—
—
—
—
—
—
—
—
4
64
—
—
—
—
—
—
3,024
87
1,221
292
90
—
—
1,603
—
—
—
—
—
—
—
—
—
—
750
44
9,522
195
2,002
152
—
105
—
2,259
—
—
—
—
83
98
—
—
296
5
2,270
156
11,891
138
3,374
—
—
—
—
3,374
—
—
—
—
146
151
—
—
721
15
—
—
10,728
158
607
73
—
484
77
1,241
7,610
47
3,647
56
78
—
689
—
—
767
—
—
318
—
—
318
Notes:
(1) Based on final contractual instrument maturity.
(2) Based on first call date of instrument, however this does not indicate NatWest Group’s strategy on capital and funding management. The table above does not
include debt accounted Tier 1 instruments although those instruments form part of the total subordinated debt balance.
(3) The weighted average spread reflects the average net funding cost to NatWest Group and is calculated on an indicative basis.
(4) The roll-off table is based on sterling-equivalent balance sheet values.
NatWest Group Annual Report and Accounts 2020
223
Risk and capital management
Capital, liquidity and funding risk continued
Liquidity portfolio
The table below shows the liquidity portfolio by product, with primary liquidity aligned to internal stressed outflow coverage and regulatory LCR
categorisation. Secondary liquidity comprises assets eligible for discount at central banks, which do not form part of the liquid asset portfolio for
LCR or stressed outflow purposes.
Cash and balances at central banks
AAA to AA- rated governments
A+ and lower rated governments
Government guaranteed issuers, public sector entities and
government sponsored entities
International organisations and multilateral development banks
LCR level 1 bonds
LCR level 1 assets
LCR level 2 assets
Non-LCR eligible assets
Primary liquidity
Secondary liquidity (4)
Total liquidity value
Liquidity value
NatWest
Group (1)
£m
115,820
50,901
79
272
3,140
54,392
170,212
124
—
170,336
91,985
262,321
2020
NWH
Group (2)
£m
86,575
37,086
—
272
2,579
39,937
126,512
—
—
126,512
91,761
218,273
UK DoL
Sub (3)
£m
86,575
35,875
—
141
2,154
38,170
124,745
—
—
124,745
88,774
213,519
NatWest
Group (1)
£m
74,289
46,622
1,277
251
2,393
50,543
124,832
—
88
124,920
74,431
199,351
2019
NWH
Group (2)
£m
51,080
35,960
—
251
2,149
38,360
89,440
—
—
89,440
74,187
163,627
UK DoL
Sub (3)
£m
51,080
34,585
—
90
1,717
36,392
87,472
—
—
87,472
73,332
160,804
Notes:
(1) NatWest Group includes the UK Domestic Liquidity Sub-Group (UK DoLSub), NatWest Markets Plc and other significant operating subsidiaries that hold liquidity
portfolios. These include RBS International Limited, NWM N.V. and Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that
may differ from PRA rules.
(2) NWH Group comprises UK DoLSub & Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules.
(3) UK DoLSub comprises NatWest Group’s four licensed deposit-taking UK banks within the ring-fenced bank: NWB Plc, RBS plc, Coutts & Company and Ulster
Bank Limited.
(4) Comprises assets eligible for discounting at the Bank of England and other central banks.
(5) Liquidity portfolio table approach has been aligned to the ILAAP methodology with effect from December 2019.
(6) NatWest Markets Plc liquidity portfolio is reported in the NatWest Markets Plc Annual Report and Accounts.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
224
Risk and capital management
Capital, liquidity and funding risk continued
Funding sources
The table below shows the carrying values of the principal funding sources based on contractual maturity. Balance sheet captions include
balances held at all classifications under IFRS 9.
Bank deposits
Repos
Other bank deposits (1) (2)
Customer deposits
Repos
Non-bank financial institutions
Personal
Corporate
Trading liabilities (3)
Repos (4)
Derivative collateral
Other bank and customer deposits
Debt securities in issue - Medium term notes
Other financial liabilities
Customer deposits
Debt securities in issue:
Commercial papers and certificates of deposit
Medium term notes
Covered bonds
Securitisations
Subordinated liabilities
Total funding
Of which: available in resolution (5)
Short-term
less than
1 year
£m
6,470
5,845
12,315
5,167
53,475
208,046
163,595
430,283
19,036
23,229
819
527
43,611
616
7,086
4,648
53
—
12,403
365
498,977
—
2020
Long-term
more than
1 year
£m
—
8,291
8,291
—
147
1,183
126
1,456
—
—
985
881
1,866
180
168
29,078
2,967
1,015
33,408
9,597
54,618
28,823
Total
£m
6,470
14,136
20,606
5,167
53,622
209,229
163,721
431,739
19,036
23,229
1,804
1,408
45,477
796
7,254
33,726
3,020
1,015
45,811
9,962
553,595
28,823
Short-term
less than
1 year
£m
2,598
6,688
9,286
1,765
48,759
183,124
133,450
367,098
27,885
21,509
710
659
50,763
—
4,272
4,592
3,051
—
11,915
160
439,222
—
2019
Long-term
more than
1 year
£m
—
11,207
11,207
—
352
1,210
587
2,149
—
—
896
1,103
1,999
—
6
29,262
2,897
1,140
33,305
9,819
58,479
26,168
Total
£m
2,598
17,895
20,493
1,765
49,111
184,334
134,037
369,247
27,885
21,509
1,606
1,762
52,762
—
4,278
33,854
5,948
1,140
45,220
9,979
497,701
26,168
Notes:
(1) Long-term more than 1 year includes £5.0 billion of Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises participation which
(2)
has been repaid early in January 2021.
Includes nil (2019 – £10.0 billion) relating to Term Funding Scheme participation, £5.0 billion (2019 – nil) relating to Term Funding Scheme with additional
incentives for Small and Medium-sized Enterprises participation and £2.8 billion (2019 – £1.7 billion) relating to NatWest Group’s participation in central bank
financing operations under the European Central Bank’s targeted long-term financing operations.
(3) Excludes short positions of £26.8 billion (2019 – £21.2 billion).
(4) Comprises central & other bank repos of £1.0 billion (2019 – £6.6 billion), other financial institution repos of £16.0 billion (2019 – £19.0 billion) and other
corporate repos of £2.0 billion (2019 – £2.3 billion).
(5) Eligible liabilities (as defined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies,
guidelines, or statements of the Bank of England including the Statement of Policy published by the Bank of England in June 2018. The balance consists of
£20.9 billion (2019 – £19.2 billion) under debt securities in issue (senior MREL) and £7.9 billion (2019 – £6.9 billion) under subordinated liabilities.
NatWest Group Annual Report and Accounts 2020
225
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Capital, liquidity and funding risk continued
Contractual maturity
This table shows the residual maturity of financial instruments, based on contractual date of maturity of NatWest Group’s banking activities,
including hedging derivatives. Trading activities, comprising mandatory fair value through profit or loss (MFVTPL) assets and held-for-trading
(HFT) liabilities have been excluded from the maturity analysis due to their short-term nature and are shown in total in the table below.
Banking activities
2020
Cash and balances at central banks
Trading assets
Derivatives
Settlement balances
Loans to banks - amortised cost
Loans to customers - amortised cost (1)
Personal
Corporate
NBFI
Other financial assets
Total financial assets
2019
Total financial assets
2020
Bank deposits excluding repos (2)
Bank repos
Customer repos
Customer deposits excluding repos
Personal
Corporate
NBFI
Settlement balances
Trading liabilities
Derivatives
Other financial liabilities
CPs and CDs
Medium-term notes
Covered bonds
Securitisations
Customer deposits DFV
Subordinated liabilities
Notes in circulation
Lease liabilities
Total financial liabilities
2019
Total financial liabilities
Less than
£m
—
—
—
—
450
£m
124,489
—
9
2,297
5,129
Subtotal 1-3 years 3-5 years
£m
—
—
—
—
2
1 month 1-3 months 3-6 months
£m
—
—
—
—
1,240
More than
6 months
5 years
- 1 year
£m
£m
£m
£m
— 124,489
— 124,489
—
—
—
12
11
20
— 2,297
— 2,297
6,955
6,835
16
33,292 18,458 18,682 23,083 93,515 62,170 42,171 168,672 366,528
6,999 19,003 24,066 21,061 139,788 203,918
8,738 41,038 31,255 19,830 27,539 119,662
1,345 42,948
7,346 33,474
1,280
8,837 12,027 10,207 23,637 54,708
3,797
Trading
Total
Total activities
£m
£m
— 124,489
— 68,990 68,990
93 166,430 166,523
— 2,297
— 6,955
— 366,528
— 203,918
— 119,662
— 42,948
440 55,148
167,371 20,237 21,478 26,907 235,993 74,266 52,380 192,431 555,070 235,860 790,930
3,768
2,700
4,874
4,928
5,258 10,830 10,040
1,556
1,329
2,155
£m
—
—
61
—
8
5,536
22,498
6,849
110
129,976 17,129 14,948 22,430 184,483 74,283 52,159 173,579 484,504 227,287 711,791
4,532
4,845
5,167
407,497
201,876
157,579
48,042
2,414
—
—
1,496
1,206
241
49
—
—
8
2,655
18
431
260
—
5,889
2,481
2,244
1,164
—
—
(12)
4,093
1,685
1,788
4
—
616
23
—
46
428,632 17,297 10,730
476
1,365
—
9,100
1,789
3,237
4,074
3,131
—
26
3,151
2,047
1,104
—
—
—
16
—
32
406
3,254
—
—
1,403
1,183
91
129
—
—
67
— 14,136
— 6,470
— 5,167
32 426,572
— 209,229
31 163,721
1 53,622
— 5,545
—
47
5,845
— 6,470
— 5,167
2,630 425,116
1,900 208,046
535 163,595
195 53,475
— 5,545
—
—
14
—
5,037
—
—
21
—
4
17
—
—
2
3,663 12,403 14,445 11,054
2,148
3
8,538
1,515
2,217
—
296
—
—
—
3,349
318
—
245
— 14,136
— 6,470
— 5,167
— 426,572
— 209,229
— 163,721
— 53,622
— 5,545
— 72,256 72,256
130 160,575 160,705
— 45,811
— 7,254
— 33,726
— 3,020
— 1,015
—
796
— 9,962
— 2,655
— 1,698
7,106 463,765 23,319 19,708 11,354 518,146 232,831 750,977
7,909 45,811
— 7,254
7,190 33,726
— 3,020
1,015
796
9,962
— 2,655
1,698
7,086
165
4,648 13,350
750
—
180
3,855
—
295
53
—
616
365
— 2,655
185
89
719
—
2,393
973
361,384 15,085
9,373
8,992 394,834 26,435 18,352 13,341 452,962 220,806 673,768
Notes:
(1) Loans to customers excludes £6.0 billion (2019 – £3.7 billion) of impairment provisions.
(2) 3-5 years includes £5.0 billion of Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises participation which has been
repaid early in January 2021.
NatWest Group Annual Report and Accounts 2020
226
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Capital, liquidity and funding risk continued
Senior notes and subordinated liabilities - residual maturity profile by instrument type
The table below shows NatWest Group’s debt securities in issue and subordinated liabilities by residual maturity.
Trading
liabilities
Other financial liabilities
Debt securities in issue
Debt securities
in issue
MTNs
£m
527
169
240
472
1,408
Commercial
paper
and CDs
£m
7,086
165
3
—
7,254
659
321
217
565
1,762
4,272
3
3
—
4,278
MTNs
£m
4,648
13,349
8,538
7,191
33,726
4,592
10,452
10,212
8,598
33,854
2020
Less than 1 year
1-3 years
3-5 years
More than 5 years
Total
2019
Less than 1 year
1-3 years
3-5 years
More than 5 years
Total
The table below shows the currency breakdown.
2020
Commercial paper and CDs
MTNs
Covered bonds
Securitisation
Subordinated liabilities
Total
2019 total
Covered
bonds Securitisation
£m
—
—
296
719
1,015
£m
53
749
2,218
—
3,020
Subordinated
liabilities
£m
365
3,854
3,349
2,394
9,962
—
—
—
1,140
1,140
USD
£m
976
16,822
—
—
7,253
25,051
160
2,393
4,931
2,495
9,979
EUR
£m
3,355
14,150
1,157
243
1,012
19,917
3,051
—
2,897
—
5,948
GBP
£m
2,923
1,678
1,863
772
1,697
8,933
8,313
Total
£m
12,152
18,117
14,404
10,304
54,977
12,075
12,848
18,043
12,233
55,199
Other
£m
—
2,484
—
—
—
2,484
Total notes
in issue
£m
12,679
18,286
14,644
10,776
56,385
12,734
13,169
18,260
12,798
56,961
Total
£m
7,254
35,134
3,020
1,015
9,962
56,385
24,041
22,257
2,350
56,961
Funding gap: maturity and segment analysis
The contractual maturity of balance sheet assets and liabilities reflects
the maturity transformation role banks perform, lending long-term but
mainly obtaining funding through short-term liabilities such as
customer deposits. In practice, the behavioural profiles of many
liabilities show greater stability and longer maturity than the contractual
maturity. This is particularly true of many types of retail and corporate
deposits which, despite being repayable on demand or at short notice,
have demonstrated very stable characteristics even in periods of acute
stress.
In its analysis to assess and manage asset and liability maturity gaps,
NatWest Group determines the expected customer behaviour through
qualitative and quantitative techniques. These incorporate observed
customer behaviours over long periods of time. This analysis is subject
to governance through NatWest Group ALCo Technical committee
down to a segment level.
The net behavioural funding surplus/(gap) and contractual maturity
analysis is set out below.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
Loans to customers
Less
than
1 year
£bn
12
2
36
5
5
15
—
75
1-5
Greater
than
years 5 years
£bn
123
10
27
5
3
1
—
169
£bn
37
6
45
7
6
3
—
104
Total
£bn
172
18
108
17
14
19
—
348
1-5
Contractual maturity (1)
Customer accounts
Greater
than
Total
years 5 years
£bn
£bn
— 172
—
20
— 168
32
—
31
—
16
—
—
1
— 440
£bn
1
—
—
—
—
1
—
2
Less
than
1 year
£bn
171
20
168
32
31
15
1
438
1-5
Net funding surplus/(gap)
Less
than
1 year
£bn
£bn
(36)
159
(6)
18
(45)
132
(7)
27
26
(6)
— (2)
—
1
363 (102)
Greater
than
years 5 years
£bn
(123)
(10)
(27)
(5)
(3)
(1)
—
(169)
Total
£bn
—
2
60
15
17
(3)
1
92
1-5
Behavioural maturity
Net surplus/(gap)
Greater
than
years 5 years
£bn
(4)
—
—
9
8
(1)
—
12
Less
than
1 year
£bn
£bn
6
(2)
—
2
45
15
5
1
5
4
— (2)
—
1
58
22
m
a
n
a
g
e
m
e
n
t
Total
£bn
—
2
60
15
17
(3)
1
92
81
103
147
331
376
3
— 379
295 (100)
(147)
48
1
36
11
48
2020
Retail Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
2019
Total
Note:
(1) Loans to customers and customer accounts include trading assets and trading liabilities respectively and excludes reverse repos and repos.
Key points
The net customer funding surplus has increased by £44 billion
during 2020 to £92 billion driven by £61 billion deposit growth and
£17 billion loan growth.
Customer deposits and customer loans are broadly matched from
a behavioural perspective.
The net funding surplus in 2020 is mainly concentrated in the
longer dated buckets, reflecting stable characteristics of customer
deposits.
NatWest Group Annual Report and Accounts 2020
227
Risk and capital management
Capital, liquidity and funding risk continued
Encumbrance
NatWest Group evaluates the extent to which assets can be financed
in a secured form (encumbrance), but certain asset types lend
themselves more readily to encumbrance. The typical characteristics
that support encumbrance are an ability to pledge those assets to
another counterparty or entity through operation of law without
necessarily requiring prior notification, homogeneity, predictable and
measurable cash flows, and a consistent and uniform underwriting and
collection process. Retail assets including residential mortgages, credit
card receivables and personal loans display many of these features.
NatWest Group categorises its assets into four broad groups, those
that are:
Already encumbered and used to support funding currently in place
through own-asset securitisations, covered bonds and securities
repurchase agreements.
Balance sheet encumbrance
The table shows the retained encumbrance assets of NatWest Group.
Encumbered as a result of
transactions with
counterparties
other than central banks
Covered
debts &
securitisations
(1) (2)
£bn
—
—
—
—
0.1
14.7
SFT,
derivatives
and similar
(3) (4)
£bn
£bn
4.9
4.9
49.3
49.3
—
—
—
—
0.1
0.2
— 14.7
Total (5)
10.0
1.9
—
—
2.8
—
—
—
14.8
— 10.0
1.9
—
—
—
—
—
2.8
—
16.5
16.5
—
—
—
—
85.6
70.8
2020
Cash and balances at central banks
Trading assets
Derivatives
Settlement balances
Loans to banks - amortised cost
Loans to customers - amortised cost
- residential mortgages
- UK
- RoI
- credit cards
- personal loans
- other
Other financial assets
Intangible assets
Other assets
Total assets
2019
Total assets
Pre-positioned with central banks as part of funding schemes and
those encumbered under such schemes.
Ring-fenced to meet regulatory requirement, where NatWest Group
has in place an operational continuity in resolution (OCIR)
investment mandate wherein PRA requires critical service
providers to hold segregated liquidity buffers covering at least 50%
of their annual fixed overheads.
Not currently encumbered. In this category, NatWest Group has in
place an enablement programme which seeks to identify assets
capable of being encumbered and to identify the actions to facilitate
such encumbrance whilst not affecting customer relationships or
servicing.
Programmes to manage the use of assets to actively support
funding are established within UK DoLSub, UBI DAC and NatWest
Markets Plc.
Pre-positioned
& encumbered
assets held
at central
Collateral
ring - fenced
to meet reg
requirement
Unencumbered assets not
pre-positioned
with central banks
Readily
Other
available available
Cannot
be used
banks (6)
(7)
(8)
(9)
(10)
Total
Total
£bn
—
—
—
—
—
134.0
125.7
6.3
—
—
2.0
—
—
—
134.0
£bn
£bn
— 119.6
—
—
—
—
—
—
6.2
—
42.4
—
£bn
£bn
£bn
— 119.6
—
0.3
19.7
19.4
— 166.5 166.5
2.3
2.3
—
0.3
6.8
0.3
48.9 211.8
120.5
—
—
—
—
—
2.2
—
—
2.2
26.8
5.0
3.4
4.9
2.3
35.5
—
—
203.7
13.1
—
0.4
2.5
104.5
0.2
—
1.8
123.1
— 39.9
5.0
—
3.8
—
9.0
1.6
47.3 154.1
36.4
6.7
7.9
250.9 577.7
0.7
6.7
6.1
£bn
124.5
69.0
166.5
2.3
7.0
360.5
175.6
13.2
3.8
9.0
158.9
55.1
6.7
7.9
799.5
12.3
65.0
77.3
115.6
2.4
186.7
111.9
229.1 527.7
723.0
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Covered debts and securitisations include securitisations, conduits, covered bonds and secured notes.
Excludes £1.7 billion of loans and advances to customers in 2019 providing security for retained own issued securities. There were £14 billion encumbered
assets resulting from covered debts and securitisations in 2019 including those assets.
Repos and other secured deposits, cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation are
included here rather than within those positioned at the central bank as they are part of normal banking operations. Securities financing transactions (SFT)
include collateral given to secure derivative liabilities.
Derivative cash collateral of £18.8 billion (2019 - £20.6 billion) has been included in the encumbered assets basis the regulatory requirement.
Total assets encumbered as a result of transactions with counterparties other than central banks are those that have been pledged to provide security and
are therefore not available to secure funding or to meet other collateral needs.
Assets pre-positioned at the central banks include loans provided as security as part of funding schemes and those encumbered under such schemes.
Ring-fenced to meet regulatory requirement includes assets ring fenced to meet operational continuity in resolution (OCIR) investment mandate.
Readily available for encumbrance: including assets that have been enabled for use with central banks but not pre-positioned; cash and high quality debt
securities that form part of NatWest Group’s liquidity portfolio and unencumbered debt securities.
Other assets that are capable of being encumbered are those assets on the balance sheet that are available for funding and collateral purposes but are not
readily realisable in their current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and
external documentation review and diligence work.
Cannot be used includes:
(a) Derivatives, reverse repurchase agreements and trading related settlement balances.
(b) Non-financial assets such as intangibles, prepayments and deferred tax.
(c) Loans that cannot be pre-positioned with central banks based on criteria set by the central banks, including those relating to date of origination and
level of documentation.
(d) Non-recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral.
In accordance with market practice, NatWest Group employs securities recognised on the balance sheet, and securities received under reverse repo
transactions as collateral for repos.
NatWest Group Annual Report and Accounts 2020
228
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Market risk
NatWest Group is exposed to non-traded market risk through its
banking activities and to traded market risk through its trading
activities. Non-traded and traded market risk exposures are managed
and discussed separately. The non-traded market risk section begins
below. The traded market risk section begins on page 236. Pension-
related activities also give rise to market risk. Refer to page 240 for
more information on risk related to pensions.
Non-traded market risk
Definition
Non-traded market risk is the risk to the value of assets or liabilities
outside the trading book, or the risk to income, that arises from
changes in market prices such as interest rates, foreign exchange
rates and equity prices, or from changes in managed rates.
Sources of risk
The key sources of non-traded market risk are interest rate risk; credit
spread risk; foreign exchange risk; equity risk; and accounting volatility
risk.
Each of these risk types are largely managed separately. For detailed
qualitative and quantitative information on each of them, refer to the
separate sub-sections following the VaR table below.
Key developments in 2020
The outbreak of COVID-19 triggered exceptional volatility in non-
traded market risk factors in March 2020 and a global sell-off
across all asset classes. This notably affected credit spreads (the
spread between bond yield and swap rates) arising from the
liquidity portfolios held by Treasury and resulted in a sharp
increase in total non-traded VaR for 2020.
During 2020, the Bank of England signalled a negative UK base
rate as a possibility. This could have an adverse impact on
NatWest Group’s earnings, primarily because it could result in: (i)
a lower yield on the structural hedge; and (ii) a narrower margin
between loan and deposit rates. The impact on earnings of a
downward shift resulting in a negative base rate is discussed on
page 232.
The five-year sterling interest rate swap rate fell to 0.08% at 31
December 2020 from 0.81% at 31 December 2019. The
corresponding ten-year rate fell to 0.26% from 0.93%. The
structural hedge provides some protection against volatility in
interest rates. As a result, the move in the structural hedge yield
over the same period was less material, falling to 1.06% from
1.20%.
NatWest Group continued to make progress on the transition from
LIBOR to alternative risk-free rates. An increasing proportion of
structural hedges and hedges of other portfolios are written
against swaps linked to SONIA, instead of LIBOR.
Sterling strengthened against the US dollar and weakened against
the euro over the period. Against the dollar, sterling was 1.37 at 31
December 2020 compared to 1.32 at 31 December 2019. Against
the euro, it was 1.11 at 31 December 2020 compared to 1.18 at 31
December 2019. Structural foreign currency exposures increased,
in sterling equivalent terms, by £49 million over the period.
Governance
Responsibility for identifying, measuring, monitoring and controlling
market risk arising from non-trading activities lies with the relevant
business. Oversight is provided by the independent Risk function.
Risk positions are reported monthly to the Executive Risk Committee
and quarterly to the Board Risk Committee, as well as to the Asset &
Liability Management Committee (monthly in the case of interest rate,
credit spread and accounting volatility risks and quarterly in the case of
foreign exchange and equity risks). Market risk policy statements set
out the governance and risk management framework.
Risk appetite
NatWest Group’s qualitative appetite is set out in the non-traded
market risk appetite statement.
Its quantitative appetite is expressed in terms of value-at-risk (VaR),
stressed value-at-risk (SVaR), sensitivity and stress limits, and
earnings-at-risk limits.
The limits are reviewed to reflect changes in risk appetite, business
plans, portfolio composition and the market and economic
environments. To ensure approved limits are not breached and that
NatWest Group remains within its risk appetite, triggers at NatWest
Group and lower levels have been set and are actively managed. For
further information on risk appetite and risk controls, refer to page 160.
Risk measurement
Non-traded internal VaR (1-day 99%)
The following table shows one-day internal banking book value-at-risk (VaR) at a 99% confidence level, split by risk type. NatWest Group’s VaR
metrics are explained on page 231. Each of the key risk types are discussed in greater detail in their individual sub-sections following this table.
2020
2019
Interest rate
Euro
Sterling
US dollar
Other
Credit spread
Structural foreign exchange rate
Equity
Pipeline risk (1)
Diversification (2)
Total
Notes:
(1) Pipeline risk is the risk of loss arising from personal customers owning an option to draw down a loan – typically a mortgage – at a committed rate, where
159.9
70.8
48.1
64.6
Maximum
£m
17.7
4.6
20.1
16.5
0.9
121.1
14.7
35.4
0.7
Minimum
£m
8.0
1.1
6.6
5.9
0.3
63.7
9.1
24.9
0.3
Period end
£m
12.3
4.6
14.1
8.7
0.3
111.5
8.9
11.6
0.3
4.2
148.8
Average
£m
14.1
1.9
13.3
10.7
0.6
103.2
10.8
28.5
0.5
(18.9)
138.2
Average
£m
11.0
1.3
10.8
4.6
0.4
55.6
15.2
34.5
0.4
(57.1)
59.6
Maximum
£m
14.0
2.3
14.1
6.0
0.7
59.7
23.8
38.6
0.9
Minimum
£m
8.0
0.7
8.0
3.4
0.2
49.2
7.2
31.6
0.2
Period end
£m
8.2
1.3
8.0
5.2
0.7
59.7
8.6
33.5
0.2
(45.6)
64.6
interest rate changes may result in greater or fewer customers than anticipated taking up the committed offer.
(2) NatWest Group benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends
on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types
less the total portfolio VaR.
Key points
The increase in credit spread and total VaR reflects the impact of
the outbreak of COVID-19, as explained in ‘Key developments in
2020’ above.
The decrease in equity VaR reflects the disposal of SABB in Q4
2020.
NatWest Group Annual Report and Accounts 2020
229
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Non-traded market risk continued
Interest rate risk
Non-traded interest rate risk (NTIRR) arises from the provision to
customers of a range of banking products with differing interest rate
characteristics. When aggregated, these products form portfolios of
assets and liabilities with varying degrees of sensitivity to changes in
market interest rates. Mismatches can give rise to volatility in net
interest income as interest rates vary.
NTIRR comprises the following three primary risk types:
Gap risk – arises from the timing of rate changes in non-trading
book instruments. The extent of gap risk depends on whether
changes to the term structure of interest rates occur consistently
across the yield curve (parallel risk) or differentially by period (non-
parallel risk).
Basis risk – captures the impact of relative changes in interest rates
for financial instruments that have similar tenors but are priced
using different interest rate indices, or on the same interest rate
indices but with different tenors.
Option risk – arises from option derivative positions or from optional
elements embedded in assets, liabilities and/or off-balance sheet
items, where NatWest Group or its customer can alter the level and
timing of their cash flows. Option risk also includes pipeline risk.
To manage exposures within its risk appetite, NatWest Group
aggregates interest rate positions and hedges its residual exposure,
primarily with interest rate swaps.
Structural hedging aims to reduce gap risk and the sensitivity of
earnings to interest rate shocks. It also provides some protection
against prolonged periods of falling rates. Structural hedging is
explained in greater detail below, followed by information on how
NatWest Group measures NTIRR from both an economic value-based
and an earnings-based perspective.
Structural hedging
NatWest Group has a significant pool of stable, non and low interest-bearing liabilities, principally comprising equity and money transmission
accounts. These balances are usually hedged, either by investing directly in longer-term fixed-rate assets (such as fixed-rate mortgages or UK
government gilts) or by using interest rate swaps, which are generally booked as cash flow hedges of floating-rate assets, in order to provide a
consistent and predictable revenue stream.
After hedging the net interest rate exposure externally, NatWest Group allocates income to equity or products in structural hedges by reference
to the relevant interest rate swap curve. Over time, this approach has provided a basis for stable income attribution to products and interest rate
returns. The programme aims to track a time series of medium-term swap rates, but the yield will be affected by changes in product volumes
and NatWest Group’s capital composition.
The table below shows the incremental income allocation above three-month LIBOR, total income allocation including three-month LIBOR, the
period end and average notional balances, and the total yield including three-month LIBOR associated with the structural hedges managed by
NatWest Group.
Equity structural hedging
Product structural hedging
Other structural hedges
Total
Incremental
income
£m
478
543
119
1,140
Total
income
£m
580
958
150
1,688
2020
Period end
notional
£bn
23
125
21
169
Average
notional
£bn
24
115
20
159
Total
yield
%
2.43
0.83
0.73
1.06
Incremental
income
£m
399
183
61
643
Total
income
£m
644
1,094
166
1,904
2019
Period end
notional
£bn
25
111
21
157
Average
notional
£bn
27
111
21
159
Total
yield
%
2.36
0.99
0.79
1.20
Equity structural hedges refer to income allocated primarily to equity and reserves. At 31 December 2020, the equity structural hedge notional
was allocated between NWH Group and NWM Plc in a ratio of approximately 80/20 respectively. Rates on new equity structural hedges
continued to fall, but the reduction in the hedge notional has resulted in a higher overall yield.
Product structural hedges refer to income allocated to customer products by NWH Treasury, mainly current accounts and customer deposits in
Commercial Banking and Retail Banking (excluding Ulster Bank Limited). Other structural hedges refer to hedges managed by UBI DAC,
Private Banking, Ulster Bank Limited and RBS International.
At 31 December 2020, approximately 92% by notional of total structural hedges were sterling-denominated.
The following table presents the incremental income associated with product structural hedges at segment level.
Retail Banking
Commercial Banking
Total
2020
£m
251
292
543
2019
£m
85
98
183
Key points
The five-year sterling swap rate fell to 0.08% at the end of
December 2020 from 0.81% at the end of December 2019. The ten-
year sterling swap rate also fell, to 0.26% from 0.93%.
The yield of the structural hedge fell as new product hedges and
maturing hedges across the portfolio are reinvested at lower market
rates. At 1.06%, the overall yield was still higher than market swap
rates at 31 December 2020.
The increase in hedge notional, on a period-end basis, mainly
resulted from increased hedging of Personal and Commercial
deposits. This reflected the increase in underlying customer deposit
balances in 2020.
Incremental income in excess of three-month LIBOR increased in
2020. This was primarily due to lower three-month LIBOR fixings,
resulting in increased income benefit from the hedge.
NatWest Group Annual Report and Accounts 2020
230
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Non-traded market risk continued
NTIRR can be measured from either an economic value-based or
earnings-based perspective, or a combination of the two. Value-based
approaches measure the change in value of the balance sheet assets
and liabilities including all cash flows. Earnings-based approaches
measure the potential impact on the income statement of changes in
interest rates over a defined horizon, generally one to three years.
NatWest Group uses VaR as its value-based approach and sensitivity
of net interest earnings as its earnings-based approach.
These two approaches provide complementary views of the impact of
interest rate risk on the balance sheet at a point in time. The scenarios
employed in the net interest earnings sensitivity approach may
incorporate assumptions about how NatWest Group and its customers
will respond to a change in the level of interest rates. In contrast, the
VaR approach measures the sensitivity of the balance sheet at a point
in time. Capturing all cash flows, VaR also highlights the impact of
duration and repricing risks beyond the one-to-three-year period
shown in earnings sensitivity calculations.
Value-at-risk
VaR is a statistical estimate of the potential change in the market value
of a portfolio (and, thus, the impact on the income statement) over a
specified time horizon at a given confidence level.
NatWest Group’s standard VaR metrics – which assume a time
horizon of one trading day and a confidence level of 99% – are based
on interest rate repricing gaps at the reporting date. Daily rate moves
are modelled using observations from the last 500 business days.
These incorporate customer products plus associated funding and
hedging transactions as well as non-financial assets and liabilities.
Behavioural assumptions are applied as appropriate.
The non-traded interest rate risk VaR metrics for NatWest Group’s
retail and commercial banking activities are included in the banking
book VaR table presented earlier in this section. The VaR captures the
risk resulting from mismatches in the repricing dates of assets and
liabilities.
It also includes any mismatch between the maturity profile of external
hedges and NatWest Group’s target maturity profile for the hedge.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
231
Risk and capital management
Non-traded market risk continued
Sensitivity of net interest earnings
Net interest earnings are sensitive to changes in the level of interest
rates, mainly because maturing structural hedges are replaced at
higher or lower rates and changes to coupons on managed rate
customer products do not always match changes in market rates of
interest or central bank policy rates.
Earnings sensitivity is derived from a market-implied forward rate
curve. A simple scenario is shown that projects forward earnings
based on the 31 December 2020 balance sheet, which is assumed to
remain constant. A base-case earnings forecast is derived from the
market-implied curve, which is then subject to interest rate shocks.
The difference between the base-case forecast and the shock gives an
indication of underlying sensitivity to interest rate movements.
Reported sensitivities should not be considered a forecast of future
performance in these rate scenarios. Actions that could reduce interest
earnings sensitivity include changes in pricing strategies on customer
loans and deposits as well as hedging. Management action may also
be taken to stabilise total income also taking into account non-interest
income.
2020
Structural hedges
Managed margin
Other
Total
2019
Structural hedges
Managed margin
Other
Total
Three-year 25-basis-point sensitivity table
The table below shows the sensitivity of net interest earnings – for
both structural hedges and managed rate accounts – on a one, two
and three-year forward-looking basis to an upward or downward
interest rate shift of 25 basis points.
In the upward rate scenario, yield curves were assumed to move in
parallel, at both year-ends.
The downward rate scenario at 31 December 2020 allows interest
rates to fall to negative rates. The downward rate scenario at 31
December 2019 assumed that interest rates would floor at 0%, or the
then negative rate. This assumption affected only euro, not sterling or
US dollar, interest rates.
+25 basis points upward shift
-25 basis points downward shift
Year 1
Year 2 (1)
Year 3 (1)
Year 1
Year 2 (1)
Year 3 (1)
£m
37
319
15
371
31
195
(14)
212
£m
118
380
498
97
195
292
£m
199
387
586
168
196
364
£m
(37)
(258)
(20)
(315)
(27)
(158)
15
(170)
£m
(118)
(285)
£m
(199)
(292)
(403)
(491)
(90)
(127)
(154)
(128)
(217)
(282)
Note:
(1) The projections for Year 2 and Year 3 consider only the main drivers of earnings sensitivity, namely structural hedging and margin management.
Key points
The increased favourable sensitivity to the 25-basis-point upward
shifts in yield curves over 2020 was mainly driven by: (i)
significantly increased volumes of savings and current accounts;
and (ii) changes to estimates of the extent to which NatWest
Group passes through the impact of changes in interest rates to
these products.
The estimated impact on managed margin portfolios of the
downward shift into negative interest rates is affected by
assumptions regarding the extent to which negative rates are
passed through to both deposits and loans.
One-year 25 and 100-basis-point sensitivity table
The following table analyses the one-year scenarios by currency and, in addition, shows the impact over one year of a 100-basis-point upward
shift in all interest rates.
Euro
Sterling
US dollar
Other
Total
2020
Shifts in yield curve
-25
basis points
£m
(6)
(287)
(22)
—
(315)
+25
basis points
£m
7
336
26
2
371
+100
basis points
£m
99
1,109
102
7
1,317
2019
Shifts in yield curve
-25
basis points
£m
(2)
(158)
(11)
1
(170)
+25
basis points
£m
25
172
16
(1)
212
+100
basis points
£m
129
716
66
(3)
908
NatWest Group Annual Report and Accounts 2020
232
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Non-traded market risk continued
Sensitivity of fair value through other comprehensive income (FVOCI) and cash flow hedging reserves to interest rate movements
NatWest Group holds most of the bonds in its liquidity portfolio at fair value. Valuation changes that are not hedged (or not in effective hedge
accounting relationships) are recognised in FVOCI reserves.
Interest rate swaps are used to implement the structural hedging programme and also hedging of some personal and commercial lending
portfolios, primarily fixed-rate mortgages. Generally, these swaps are booked in hedge accounting relationships. Changes in the valuation of
swaps that are in effective cash flow hedge accounting relationships are recognised in cash flow hedge reserves.
The table below shows the sensitivity of FVOCI reserves and cash flow hedge reserves to a parallel shift in all rates. In this analysis, interest
rates have not been floored at zero. Cash flow hedges are assumed to be fully effective and interest rate hedges of bonds in the liquidity
portfolio are also assumed to be subject to fully effective hedge accounting. Hedge accounting ineffectiveness would result in some deviation
from the results below, with some gains or losses recognised in P&L instead of reserves. Hedge ineffectiveness P&L is monitored, and the
effectiveness of cash flow and fair value hedge relationships is regularly tested in accordance with IFRS requirements. Note that a movement in
the FVOCI reserve would have an impact on CET1 capital but a movement in the cash flow hedge reserve would not be expected to do so.
Volatility in both reserves affects tangible net asset value.
FVOCI reserves
Cash flow hedge reserves
Total
+25 basis points -25 basis points
2020
£m
(50)
(108)
(158)
£m
48
109
157
+100 basis
points
£m
(207)
(421)
(628)
-100 basis
points
£m
181
447
628
2019
+25 basis points
-25 basis points +100 basis points -100 basis points
£m
(56)
(153)
(209)
£m
55
155
210
£m
(227)
(597)
(824)
£m
210
638
848
Key points
The main driver of NatWest Group’s cash flow hedge reserve
sensitivity is the interest rate swaps that form part of the structural
hedge.
Cash flow hedge reserve sensitivity fell in 2020, mainly driven by
increased hedging of mortgage funding.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
233
Risk and capital management
Non-traded market risk continued
Credit spread risk
Credit spread risk arises from the potential adverse economic impact
of a change in the spread between bond yields and swap rates, where
the bond portfolios are accounted at fair value through equity.
NatWest Group’s bond portfolios primarily comprise high-quality
securities maintained as a liquidity buffer to ensure it can continue to
meet its obligations in the event that access to wholesale funding
markets is restricted. Additionally, other high-quality bond portfolios
are held for collateral purposes and to support payment systems.
Credit spread risk is monitored daily through sensitivities and VaR
measures. The dealing authorities in place for the bond portfolios
further mitigate the risk by imposing constraints by duration, asset
class and credit rating. Exposures and limit utilisations are reported to
senior management on a daily basis.
Foreign exchange risk
Non-traded foreign exchange risk arises from three main sources:
Structural foreign exchange risk – arises from the capital deployed
in foreign subsidiaries, branches and joint arrangements and related
currency funding where it differs from sterling.
Non-trading book foreign exchange risk – arises from customer
transactions and profits and losses that are in a currency other than
the functional currency of the transacting operation.
Foreign exchange risk
The table below shows structural foreign currency exposures.
Forecast earnings or costs in foreign currencies – NatWest Group
assesses its potential exposure to forecast foreign currency income
and expenses. NatWest Group hedges forward some forecast
expenses.
The most material non-traded open currency positions are the
structural foreign exchange exposures arising from investments in
foreign subsidiaries, branches and associates and their related
currency funding. These exposures are assessed and managed to
predefined risk appetite levels under delegated authority from the
Asset & Liability Management Committee. NatWest Group seeks to
limit the potential volatility impact on its CET1 ratio from exchange rate
movements by maintaining a structural open currency position. Gains
or losses arising from the retranslation of net investments in overseas
operations are recognised in equity reserves and reduce the sensitivity
of capital ratios to foreign exchange rate movements primarily arising
from the retranslation of non-sterling denominated RWAs. Sensitivity is
minimised where, for a given currency, the ratio of the structural open
position to RWAs equals the CET1 ratio.
The sensitivity of this ratio to exchange rates is monitored monthly and
reported to the Asset & Liability Management Committee at least
quarterly. Foreign exchange exposures arising from customer
transactions are sold down by businesses on a regular basis in line
with NatWest Group policy.
2020
US dollar
Euro
Other non-sterling
Total
2019
US dollar
Euro
Other non-sterling
Total
Net investments
in foreign
operations
£m
1,299
6,485
1,077
8,861
1,519
5,914
1,498
8,931
Structural foreign
currency
exposures
pre-economic
hedges
£m
1,296
5,656
727
7,679
1,519
5,264
847
7,630
Net
investment
hedges
£m
(3)
(829)
(350)
(1,182)
—
(650)
(651)
(1,301)
Economic
hedges (1)
£m
(1,296)
—
(1,296)
(1,519)
—
—
(1,519)
Residual
Structural
foreign
currency
exposures
£m
—
5,656
727
6,383
—
5,264
847
6,111
Note:
(1) Economic hedges of US dollar net investments in foreign operations represent US dollar equity securities that do not qualify as net investment hedges for
accounting purposes. They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available.
Economic hedges of other currency net investments in foreign operations represent monetary liabilities that are not booked as net investment hedges.
Key points
Over the period, sterling strengthened against the US dollar while it
weakened against the euro.
Hedging of other non-sterling businesses decreased following the
receipt of a distribution from Coutts & Co. Ltd as part of the wind
down of this company’s operations.
Changes in foreign currency exchange rates affect equity in
proportion to structural foreign currency exposure. For example, a
5% strengthening or weakening in foreign currencies against
sterling would result in a gain or loss of £0.4 billion in equity
respectively.
NatWest Group Annual Report and Accounts 2020
234
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Non-traded market risk continued
Equity risk
Non-traded equity risk is the potential variation in income and reserves arising from changes in equity valuations. Equity exposures may arise
through strategic acquisitions, venture capital investments and restructuring arrangements.
Investments, acquisitions or disposals of a strategic nature are referred to the Acquisitions & Disposals Committee. Once approved by the
Acquisitions & Disposals Committee for execution, such transactions are referred for approval to the Board, the Executive Committee, the Chief
Executive, the Chief Financial Officer or as otherwise required. Decisions to acquire or hold equity positions in the non-trading book that are not
of a strategic nature, such as customer restructurings, are taken by authorised persons with delegated authority.
Equity positions are carried at fair value on the balance sheet based on market prices where available. If market prices are not available, fair
value is based on appropriate valuation techniques or management estimates.
The table below shows the balance sheet carrying value of equity positions in the banking book.
Exchange-traded equity
Private equity
Other
2020
£m
14
160
78
252
The exposures may take the form of (i) equity shares listed on a recognised exchange, (ii) private equity shares defined as unlisted equity
shares with no observable market parameters or (iii) other unlisted equity shares.
Net realised gains arising from disposals
Unrealised gains included in Tier 1 or Tier 2 capital
Note:
(1)
Includes gains or losses on FVOCI instruments only.
Key point
The decrease in equity investment and losses on disposals mainly reflect the disposal of SABB.
2020
£m
(248)
82
2019
£m
627
249
76
952
2019
£m
114
(40)
Accounting volatility risk
Accounting volatility risk arises when an exposure is accounted for at
amortised cost but economically hedged by a derivative that is
accounted for at fair value. Although this is not an economic risk, the
difference in accounting between the exposure and the hedge creates
volatility in the income statement.
Accounting volatility can be mitigated through hedge accounting.
However, residual volatility will remain in cases where accounting rules
mean that hedge accounting is not an option, or where there is some
hedge ineffectiveness. Accounting volatility risk is reported to the Asset
& Liability Management Committee monthly and capitalised as part of
the Internal Capital Adequacy Assessment Process.
NatWest Group Annual Report and Accounts 2020
235
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Traded market risk
Definition
Traded market risk is the risk arising from changes in fair value on
positions, assets, liabilities or commitments in trading portfolios as a
result of fluctuations in market prices.
Sources of risk
Traded market risk mainly arises from NatWest Group’s trading
activities. These activities provide a range of financing, risk
management and investment services to clients − including
corporations and financial institutions − around the world. From a
market risk perspective, activities are focused on rates; currencies;
and traded credit. NatWest Group undertakes transactions in financial
instruments including debt securities, as well as securities financing
and derivatives.
All material traded market risk resides in NatWest Markets. The key
categories are interest rate risk, credit spread risk and foreign currency
price risk.
Trading activities may also give rise to counterparty credit risk. For
further detail refer to the Credit risk section.
Key developments in 2020
COVID-19 initially resulted in periods of exceptional market
volatility as well as increased illiquidity.
Traded VaR remained broadly consistent on an average basis with
2019 levels despite this increased market volatility. This was due
to ongoing business de-risking as part of the overall RWA
reduction strategy.
Governance
Market risk policy statements set out the governance and risk
management framework. Responsibility for identifying, measuring,
monitoring and controlling market risk arising from trading activities lies
with the relevant trading business. The Market Risk function
independently advises on, monitors and challenges the risk-taking
activities undertaken by the trading business ensuring these are within
the constraints of the market risk framework, policies, and risk appetite
statements and measures.
Risk appetite
NatWest Group’s qualitative appetite for traded market risk is set out in
the traded market risk appetite statement. Quantitative appetite is
expressed in terms of exposure limits. The limits at NatWest Group
level comprise value-at-risk (VaR) and stressed value-at-risk (SVaR).
More details on these are provided on the following pages.
For each trading business, a document known as a dealing authority
compiles details of all applicable limits and trading restrictions. The
desk-level mandates comprise qualitative limits related to the product
types within the scope of each desk, as well as quantitative metrics
specific to the desk’s market risk exposures. These additional limits
and metrics aim to control various risk dimensions such as exposure
size, aged inventory, currency and tenor.
The limits are reviewed to reflect changes in risk appetite, business
plans, portfolio composition and the market and economic
environments. The limit review has been enhanced to improve the
alignment between traded market risk exposure and capital usage.
This is done by analysing the relationship between VaR and SVaR and
NWM Plc’s solo CET1 ratio.
To ensure approved limits are not breached and that NatWest Group
remains within its risk appetite, triggers at NatWest Group and lower
levels have been set such that if exposures exceed a specified level,
action plans are developed by the relevant business and the Market
Risk function and implemented. For more detail on risk appetite and
risk controls, refer to page 160.
Monitoring and mitigation
Traded market risk is identified and assessed by gathering, analysing,
monitoring and reporting market risk information at desk, business,
franchise and NatWest Group-wide levels. Industry expertise,
continued system developments and techniques such as stress testing
are also used to enhance the effectiveness of the identification and
assessment of all material market risks.
Traded market risk exposures are monitored against limits and
analysed daily. A daily report summarising the position of exposures
against limits at desk, business, franchise and NatWest Group levels is
provided to senior management and market risk managers across the
function. Limit reporting is supplemented with regulatory capital and
stress testing information as well as ad hoc reporting.
A risk review of trading businesses is undertaken weekly with senior
risk and front office staff. This includes a review of profit and loss
drivers, notable position concentrations and other positions of concern.
Business profit and loss performance is monitored automatically
through loss triggers which, if breached, require a remedial action plan
to be agreed between the Market Risk function and the business. The
loss triggers are set using both a fall-from-peak approach and an
absolute loss level. In addition, regular updates on traded market risk
positions are provided to the Executive Risk Committee and Board
Risk Committee.
Measurement
NatWest Group uses VaR, SVaR and the incremental risk charge to
measure traded market risk. Risks that are not adequately captured by
VaR or SVaR are captured by the Risks Not In VaR (RNIV) framework
to ensure that NatWest Group is adequately capitalised for market risk.
In addition, stress testing is used to identify any vulnerabilities and
potential losses.
The key inputs into these measurement methods are market data and
risk factor sensitivities. Sensitivities refer to the changes in trade or
portfolio value that result from small changes in market parameters
that are subject to the market risk limit framework. Revaluation ladders
are used in place of sensitivities to capture the impact of large moves
in risk factors or the joint impact of two risk factors.
These methods have been designed to capture correlation effects and
allow NatWest Group to form an aggregated view of its traded market
risk across risk types, markets and business lines while also taking
into account the characteristics of each risk type.
Value-at-risk
For internal risk management purposes, VaR assumes a time horizon
of one trading day and a confidence level of 99%.
The internal VaR model – which captures all trading book positions
including those products approved by the regulator – is based on a
historical simulation, utilising market data from the previous 500 days
on an equally-weighted basis.
The model also captures the potential impact of interest rate risk;
credit spread risk; foreign currency price risk; equity price risk; and
commodity price risk.
When simulating potential movements in such risk factors, a
combination of absolute, relative and rescaled returns is used.
The performance and adequacy of the VaR model are tested regularly
through the following processes:
Back-testing – Internal and regulatory back-testing is conducted on
a daily basis. (Information on internal back-testing is provided in
this section. Information on regulatory back-testing appears in the
Pillar 3 report).
Ongoing model validation – VaR model performance is assessed
both regularly, and on an ad-hoc basis, if market conditions or
portfolio profile change significantly.
Model Risk Management review – As part of the model lifecycle,
all risk models (including the VaR model) are independently
reviewed to ensure the model is still fit for purpose given current
market conditions and portfolio profile. For further detail on the
independent model validation carried out by Model Risk
Management refer to page 244. More information relating to
pricing and market risk models is presented in the Pillar 3 report.
NatWest Group Annual Report and Accounts 2020
236
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Traded market risk continued
One-day 99% traded internal VaR
30
25
20
15
m
£
10
5
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total Trading VaR
Interest Rate VaR
Credit VaR
FX VaR
Equity VaR
Commodity VaR
Traded VaR (1-day 99%)
The table below shows one-day 99% internal VaR for NatWest Group’s trading portfolios, split by exposure type.
Interest rate
Credit spread
Currency
Equity
Commodity
Diversification (1)
Total
Average
£m
8.7
15.3
4.2
0.6
0.1
(12.8)
16.1
2020
Maximum
£m
20.2
27.2
8.4
2.0
0.6
Minimum
£m
4.8
8.7
2.1
0.2
—
25.7
10.1
Period end
£m
6.3
10.3
3.0
0.7
0.2
(10.3)
10.2
Average
£m
9.7
10.5
4.0
0.7
0.2
(10.3)
14.8
2019
Maximum
£m
16.9
14.5
10.5
2.2
0.5
Minimum
£m
6.3
7.0
1.6
0.3
0.0
21.5
10.1
Period end
£m
10.6
10.6
3.2
0.9
0.1
(11.3)
14.1
Note:
(1) NatWest Group benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends
on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types
less the total portfolio VaR.
Key points
COVID-19 and geopolitical risk resulted in periods of exceptional
market volatility and increased illiquidity during 2020. Despite this
volatility, traded VaR remained within appetite throughout the year.
Although traded VaR fluctuated throughout 2020, it remained
broadly unchanged year-on-year on an average basis, due to
business de-risking.
NatWest Group Annual Report and Accounts 2020
237
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Traded market risk continued
VaR back-testing
The main approach employed to assess the VaR model’s ongoing
performance is back-testing, which counts the number of days when a
loss exceeds the corresponding daily VaR estimate, measured at a
99% confidence level.
Two types of profit and loss (P&L) are used in back-testing
comparisons: Actual P&L and Hypothetical (Hypo) P&L. For more
details on the back-testing approach, refer to the Pillar 3 report.
The table below shows internal back-testing exceptions in the major NatWest Markets businesses for the 250-business-day period to 31
December 2020. Internal back-testing compares one-day 99% traded internal VaR with Actual and Hypo P&L.
Rates
Currencies
Credit
Back-testing exceptions
Actual
1
2
10
Hypo
4
5
10
Key points
The exceptional market volatility resulting from COVID-19 led to
back-testing exceptions across NWM businesses.
The exceptions in the Rates business were mainly driven by
market moves in sterling and euro rates and underperformance of
US Treasuries.
The exceptions in the Currencies business were mainly driven by
volatility in the foreign exchange market.
The exceptions in the Credit business were mainly driven by
bond mark-downs due to overall market weakness.
Stressed VaR (SVaR)
As with VaR, the SVaR methodology produces estimates of the potential change in the market value of a portfolio, over a specified time horizon,
at a given confidence level. SVaR is a VaR-based measure using historical data from a one-year period of stressed market conditions.
A simulation of 99% VaR is run on the current portfolio for each 250-day period from 2005 to the current VaR date, moving forward one day at a
time. The SVaR is the worst VaR outcome of the simulated results.
This is in contrast with VaR, which is based on a rolling 500-day historical data set. A time horizon of ten trading days is assumed with a
confidence level of 99%.
The internal traded SVaR model captures all trading book positions.
Total internal traded SVaR
Average
£m
97
2020
Maximum
£m
196
Minimum
£m
59
Period end
£m
87
2019
Period end
£m
90
Key point
Despite the market volatility and illiquidity resulting from COVID-19, SVaR decreased year-on-year on an average basis, primarily due to
the ongoing business de-risking.
i
R
s
k
a
n
d
c
a
p
i
t
a
l
Risks Not In VaR (RNIVs)
The RNIV framework is used to identify and quantify market risks that
are not fully captured by the internal VaR and SVaR models.
RNIV calculations form an integral part of ongoing model and data
improvement efforts to capture all market risks in scope for model
approval in VaR and SVaR.
For further qualitative and quantitative disclosures on RNIVs, refer to
the Market risk section of the Pillar 3 Report.
Stress testing
For information on stress testing, refer to page 161.
Incremental risk charge (IRC)
The IRC model quantifies the impact of rating migration and default
events on the market value of instruments with embedded credit risk
(in particular, bonds and credit default swaps) held in the trading book.
It further captures basis risk between different instruments, maturities
and reference entities. For further qualitative and quantitative
disclosures on the IRC, refer to the Market risk section of the Pillar 3
Report.
m
a
n
a
g
e
m
e
n
t
NatWest Group Annual Report and Accounts 2020
238
Risk and capital management
Market risk – linkage to balance sheet
The table below analyses NatWest Group’s balance sheet by non-trading and trading business.
2020
Non-trading
business
£bn
Total
£bn
Trading
business
£bn
Assets
Cash and balances at central banks*
124.5
124.5
Trading assets
Reverse repos
Securities
Other
Derivatives
Settlement balances
Loans to banks*
Loans to customers
Other financial assets
Intangible assets
Other assets
Total assets
Liabilities
Bank deposits
Customer deposits
Settlement balances
Trading liabilities
Repos
Short positions
Other
Derivatives
Other financial liabilities
Subordinated liabilities
Notes in circulation
Other liabilities
Total liabilities
69.0
19.4
29.2
20.4
166.5
2.3
7.0
360.5
55.1
6.7
7.9
799.5
20.6
431.7
5.5
72.3
19.0
26.8
26.5
160.7
45.8
10.0
2.7
6.4
755.7
0.3
—
—
0.3
2.3
0.1
6.9
360.4
55.1
6.7
7.9
564.2
20.6
431.7
3.3
—
—
—
—
5.2
45.1
10.0
2.7
6.4
525.0
—
68.7
19.4
29.2
20.1
164.2
2.2
0.1
0.1
—
—
—
235.3
—
—
2.2
72.3
19.0
26.8
26.5
155.5
0.7
—
—
—
230.7
2019
Non-trading
business
£bn
Trading
business
£bn Primary market risk factor
80.9
0.2
—
—
0.2
2.4
0.6
7.4
326.7
61.5
6.6
8.3
494.6
20.5
369.0
0.6
0.1
—
—
0.1
4.1
44.2
10.0
2.1
7.6
458.2
0.1 Interest rate
76.5
24.1 Interest rate
30.1 interest rate, credit spreads, equity
22.3 Interest rate
147.6 Interest rate, credit spreads, equity
3.8 Settlement
0.2 Interest rate
0.2 Interest rate
— Interest rate, credit spreads, equity
— Interest rate, credit spreads, equity
—
228.4
— Interest rate
0.2 Interest rate
3.5 Settlement
73.8
27.9 Interest rate
21.2 Interest rate, credit spreads
24.7 Interest rate
142.8 Interest rate, credit spreads
1.0 Interest rate
— Interest rate
— Interest rate
—
221.3
Total
£bn
81.0
76.7
24.1
30.1
22.5
150.0
4.4
7.6
326.9
61.5
6.6
8.3
723.0
20.5
369.2
4.1
73.9
27.9
21.2
24.8
146.9
45.2
10.0
2.1
7.6
679.5
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
Notes:
(1) Non-trading businesses are entities that primarily have exposures that are not classified as trading book. For these exposures, with the exception of pension-
related activities, the main measurement methods are sensitivity analysis of net interest income, internal non-traded VaR and fair value calculations. For more
information refer to the non-traded market risk section above.
(2) Trading businesses are entities that primarily have exposures that are classified as trading book under regulatory rules. For these exposures, the main methods
used by NatWest Group to measure market risk are detailed in the traded market risk section above.
(3) Foreign exchange risk affects all non-sterling denominated exposures on the balance sheet across trading and non-trading businesses, and therefore has not
been listed in the above tables.
NatWest Group Annual Report and Accounts 2020
239
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Pension risk
Definition
Pension risk is the risk to NatWest Group caused by its contractual or
other liabilities to, or with respect to, a pension scheme (whether
established for its employees or those of a related company or
otherwise). It is also the risk that NatWest Group will make payments
or other contributions to, or with respect to, a pension scheme
because of a moral obligation or because NatWest Group considers
that it needs to do so for some other reason.
Sources of risk
NatWest Group has exposure to pension risk through its defined
benefit schemes worldwide. The Main section of The NatWest Group
Pension Fund (the Main section) is the largest source of pension risk
with £51.3 billion of assets and £43.9 billion of liabilities at 31
December 2020 (2019 – £46.6 billion of assets and £39.7 billion of
liabilities). Refer to Note 5 to the consolidated financial statements, for
further details on NatWest Group’s pension obligations, including
sensitivities to the main risk factors.
Pension scheme liabilities vary with changes in long-term interest rates
and inflation as well as with pensionable salaries, the longevity of
scheme members and legislation. Pension scheme assets vary with
changes in interest rates, inflation expectations, credit spreads,
exchange rates, and equity and property prices. NatWest Group is
exposed to the risk that the schemes’ assets, together with future
returns and additional future contributions, are estimated to be
insufficient to meet liabilities as they fall due. In such circumstances,
NatWest Group could be obliged (or might choose) to make additional
contributions to the schemes or be required to hold additional capital to
mitigate this risk.
Key developments in 2020
There have been no material changes to NatWest Group’s
exposure to pension risk during the year. In particular, the interest
rate and inflation hedging, along with limited exposure to equities,
has meant that the positions of the main defined benefit schemes
that NatWest Group sponsors have remained resilient despite the
market shocks caused by COVID-19. More details on the assets
held by the schemes are set out in Note 5 to the consolidated
financial statements.
During 2020, the Group Pension Committee, a key component of
NatWest Group’s approach to managing pension risk, was
subsumed into the Group Asset & Liability Management
Committee, including taking on the responsibilities previously held
by the Group Pension Committee. This change was made to
increase efficiency, reflecting the steps NatWest Group has taken
to reduce the level of pension risk within NatWest Group in recent
years, but to ensure that pension risk still receives appropriate
executive attention.
The Royal Bank of Scotland Group Pension Fund formally changed
its name to the NatWest Group Pension Fund on 1 August 2020, to
align with the name of NatWest Group’s parent company.
The next triennial actuarial valuation for the Main section will have
an effective date of 31 December 2020. Under current legislation,
agreement with the Trustee would need to be reached no later than
31 March 2022.
Governance
The Group Asset & Liability Management Committee is chaired by the
Chief Financial Officer. Having replaced the Group Pension Committee
during 2020, the Group Asset & Liability Management Committee is a
key component of NatWest Group’s approach to managing pension
risk and it considers the pension impact of the capital plan for NatWest
Group and reviews performance of NatWest Group’s material pension
funds and other issues material to NatWest Group’s pension strategy
on behalf of NatWest Group. It also considers investment strategy
proposals from the Trustee of the Main section.
For further information on governance, refer to page 158.
Risk appetite
NatWest Group maintains an independent view of the risk inherent in
its pension funds. NatWest Group has an annually reviewed pension
risk appetite statement incorporating defined metrics against which risk
is measured.
Policies and standards are in place to provide formal controls for
pension risk reporting, modelling, governance and stress testing. A
pension risk policy, which sits within the NatWest Group policy
framework, is also in place and is subject to associated framework
controls.
Monitoring and measurement
Pension risk is monitored by the Executive Risk Committee and the
Board Risk Committee by way of the monthly Risk Management
Report.
NatWest Group also undertakes stress tests on its material defined
benefit pension schemes each year. These tests are also used to
satisfy the requests of regulatory bodies such as the Bank of England.
The stress testing framework includes pension risk capital calculations
for the purposes of the Internal Capital Adequacy Assessment Process
as well as additional stress tests for a number of internal management
purposes. The results of the stress tests and their consequential
impact on NatWest Group’s balance sheet, income statement and
capital position are incorporated into the overall NatWest Group stress
test results.
NatWest Bank Plc (a subsidiary of NatWest Group) is the principal
employer of the Main section and could be required to fund any deficit
that arises.
Mitigation
Following risk mitigation measures taken by the Trustee in recent
years, the Main section is now well protected against interest rate and
inflation risks and is being run on a low risk basis with relatively small
equity risk exposure. The Main section also uses derivatives to
manage the allocation of the portfolio to different asset classes and to
manage risk within asset classes.
The potential impact of climate change is one of the factors considered
in managing the assets of the Main section. The Trustee monitors the
risk to its investments from changes in the global environment and
invests, where return justifies the risk, in sectors that reduce the
world’s reliance on fossil fuels, or that may otherwise promote
environmental benefits. Further details regarding the Main section
Trustee’s approach to managing climate change risk can be found in
its Responsible Ownership Policy. The Trustee has reported in line
with the Task Force on Climate-related Financial Disclosures in its
Annual Report and Accounts.
Compliance & conduct risk
Definition
Compliance risk is the risk that the behaviour of NatWest Group
towards customers fails to comply with laws, regulations, rules,
standards and codes of conduct. Such a failure may lead to breaches
of regulatory requirements, organisational standards or customer
expectations and could result in legal or regulatory sanctions, material
financial loss or reputational damage.
Conduct risk is the risk that the conduct of NatWest Group and its
subsidiaries and its staff towards customers – or in the markets in
which it operates – leads to unfair or inappropriate customer outcomes
and results in reputational damage, financial loss or both.
Sources of risk
Compliance and conduct risks exist across all stages of NatWest
Group’s relationships with its customers and arise from a variety of
activities including product design, marketing and sales, complaint
handling, staff training, and handling of confidential insider information.
As set out in Note 26 to the consolidated financial statements,
NatWest Group and certain members of staff are party to legal
proceedings and are subject to investigation and other regulatory
action in the UK, the US and other jurisdictions.
NatWest Group Annual Report and Accounts 2020
240
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Compliance & conduct risk continued
Key developments in 2020
A customer-focused COVID-19 response was mobilised, which
included prioritised resource and operational capacity, forbearance
and participation in government schemes.
In-life monitoring of customer outcomes was extended to ensure
treatment strategies remained timely, relevant and consistent, as a
result of the continued economic uncertainty arising from COVID-
19 and Brexit.
Specialist training was delivered to support the continuous
oversight of ring-fencing embeddedness.
Work to develop a Digitised Rules Mapping platform was a
significant management focus. The platform aims to facilitate risk-
based rules mapping to regulatory obligations. This will enable
more efficient risk management of regulatory compliance matters
as well as intelligent risk taking.
The roll-out of the Banking My Way service – which enables
vulnerable customers to record their support needs – was also a
focus, helping to drive tailored solutions and outcomes.
A review of historic investment advice remediation was conducted
in order to ensure the appropriate customer outcomes were
achieved.
Governance
NatWest Group defines appropriate standards of compliance and
conduct and ensures adherence to those standards through its risk
management framework. Relevant compliance and conduct matters
are escalated through Executive Risk Committee and Board Risk
Committee.
Risk appetite
Risk appetite for compliance and conduct risks is set at Board level.
Risk appetite statements articulate the levels of risk that legal entities,
businesses and functions work within when pursuing their strategic
objectives and business plans.
A range of controls is operated to ensure the business delivers good
customer outcomes and is conducted in accordance with legal and
regulatory requirements. A suite of policies addressing compliance and
conduct risks set appropriate standards across NatWest Group.
Examples of these include the Complaints Management Policy, Client
Assets & Money Policy, and Product Lifecycle Policy as well as
policies relating to customers in vulnerable situations, cross-border
activities and market abuse. Continuous monitoring and targeted
assurance is carried out as appropriate.
Monitoring and measurement
Compliance and conduct risks are measured and managed through
continuous assessment and reporting to NatWest Group’s senior risk
committees and at Board level. The compliance and conduct risk
framework facilitates the consistent monitoring and measurement of
compliance with laws and regulations and the delivery of consistently
good customer outcomes. The first line of defence is responsible for
effective risk identification, reporting and monitoring, with oversight,
challenge and review by the second line. Compliance and conduct risk
management is also integrated into NatWest Group’s strategic
planning cycle.
Mitigation
Activity to mitigate the most-material compliance and conduct risks is
carried out across NatWest Group with specific areas of focus in the
customer- facing businesses and legal entities. Examples of mitigation
include consideration of customer needs in business and product
planning, targeted training, complaints management, as well as
independent monitoring activity. Internal policies help support a strong
customer focus across NatWest Group. Independent assessments of
compliance with applicable regulations are also carried out at a legal
entity level.
Financial crime risk
Definition
Financial crime risk is presented by criminal activity in the form of
money laundering, terrorist financing, bribery and corruption, sanctions
and tax evasion. It does not include fraud risk management.
Sources of risk
Financial crime risk may be presented if NatWest Group’s customers,
employees or third parties undertake or facilitate financial crime, or if
NatWest Group’s products or services are used to facilitate such
crime. Financial crime risk is an inherent risk across all lines of
business.
Key developments in 2020
In view of the challenges presented by COVID-19, financial crime
policies were reviewed and, where appropriate, updated to reflect
the evolving environment as well as industry best practice.
A new enterprise-wide Financial Crime Hub was established in the
first line to detect and prevent financial crime. The Hub will facilitate
a common, consistent approach to managing financial crime.
A multi-year transformation plan was developed to ensure that, as
the financial crime threat evolves with changes in technology, the
economy and wider society, risks relating to money-laundering,
terrorist-financing, tax evasion, bribery and corruption and financial
sanctions are managed, mitigated and controlled as effectively as
possible.
A new Financial Crime executive steering committee was
established to provide oversight of the transformation plan and its
implementation.
Governance
The Financial Crime Risk Executive Committee, which is chaired by
the Group Chief Financial Crime Risk Officer, is the principal financial
crime risk management forum. The committee reviews and, where
appropriate, escalates material financial crime risks and issues across
NatWest Group to the Executive Risk Committee and the Board Risk
Committee.
Risk appetite
There is no appetite to operate in an environment where systems and
controls do not enable the identification, assessment, monitoring,
management and mitigation of financial crime risk. The NatWest
Group’s systems and controls must be comprehensive and
proportionate to the nature, scale and complexity of its businesses.
There is no tolerance to systematically or repeatedly breach relevant
financial crime regulations and laws.
NatWest Group operates a framework of preventative and detective
controls designed to mitigate the risk that it could facilitate financial
crime. These controls are supported by a suite of policies, procedures
and detailed instructions to ensure they operate effectively.
Monitoring and measurement
Financial crime risks are identified and reported through continuous
risk management and regular monthly reporting to the NatWest
Group’s senior risk committees and the NatWest Group Board.
Quantitative and qualitative data is reviewed and assessed to measure
whether financial crime risk is within risk appetite.
Mitigation
Through the financial crime framework, relevant policies, systems,
processes and controls are used to mitigate financial crime risk. This
includes the use of dedicated screening and monitoring controls to
identify people, organisations, transactions and behaviours that may
require further investigation or other actions. Centralised expertise is
available to detect and disrupt threats to NatWest Group and its
customers. Intelligence is shared with law enforcement, regulators and
government bodies to strengthen national and international defences
against those who would misuse the financial system for criminal
motives.
NatWest Group Annual Report and Accounts 2020
241
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Climate-related risk
Definition
Climate-related risk is the threat of financial loss or adverse non-
financial impacts associated with climate change and the political,
economic and environmental responses to it.
Sources of risk
Physical risks may arise from climate and weather-related events such
as heatwaves, droughts, floods, storms and sea level rises. They can
potentially result in financial losses, impairing asset values and the
creditworthiness of borrowers. NatWest Group could be exposed to
physical risks directly by the effects on its property portfolio and,
indirectly, by the impacts on the wider economy as well as on the
property and business interests of its customers.
Transition risks may arise from the process of adjustment towards a
low-carbon economy. Changes in policy, technology and sentiment
could prompt reassessment of customers’ financial risk and may lead
to falls in the value of a large range of assets. NatWest Group could be
exposed to transition risks directly through the costs of adaptation
within economic sectors and markets as well as supply chain
disruption leading to financial impacts on it and its customers. Potential
indirect effects include the erosion of NatWest Group’s
competitiveness, profitability, or reputation damage.
Within these broad categories specific climate risk factors have been
identified, which give rise to climate-related risks over the short,
medium and long-term.
Key developments in 2020
Climate-related risk was elevated to a principal risk. In line with
NatWest Group’s risk management framework, the elevation will
see the implementation of a dedicated risk policy, risk appetite
statement and risk appetite measures, which are reportable to the
Board Risk Committee.
To support alignment with the 2015 Paris Agreement, NatWest
Group developed the capability to estimate financed emissions and
emissions intensities for the following: residential mortgages,
agriculture (primary farming), automotive manufacturers and oil &
gas extractors. The residential mortgage portfolio and these three
sectors were deemed the most material in terms of their proportion
of NatWest Group’s total loans and investments and susceptibility
to disruption resulting from climate change.
In preparation for the Bank of England’s 2021 Climate Biennial
Exploratory Scenario, NatWest Group developed and tested a
scenario analysis methodology to quantify a range of climate-
related risks to support business decision making and the
development of management actions. Dry runs were conducted on
a cross section of NatWest Group’s wholesale and retail
counterparties.
Climate-related risk was included as a factor in setting sector
oversight classifications, which drive the frequency and level at
which sector credit risk appetite is reviewed.
Guidance was issued to ensure appropriate consideration of
climate-related risk in internal risk and control assessments.
Within operational risk, a scenario analysis pilot was performed on
NatWest Group’s operations in India to assess the potential effects
of climate driven events including disruption to business services,
damage to physical assets and health & safety.
Enhancements have been made to the Environmental, Social &
Ethical risk management framework to mitigate reputational risk
from carbon intensive sectors and support the transition to a lower
carbon economy.
Governance
The Board is responsible for monitoring and overseeing climate-
related risk within NatWest Group’s overall business strategy and risk
appetite. The potential impact, likelihood and preparedness of climate-
related risk is reported periodically to the Board Risk Committee.
change jointly to the Group Chief Executive Officer (CEO) and the
Group Chief Risk Officer. This updated accountability supports the
CEO’s ownership of NatWest Group’s strategic climate purpose. This
responsibility includes ensuring that the financial risks from climate
change are adequately reflected in risk management frameworks, and
that NatWest Group can identify, measure, monitor, manage, and
report on its exposure to these risks.
A Group-wide Climate Change Programme (GCCP) supports the
delivery of climate-related objectives. The GCCP is overseen by an
Executive Steering Group (ESG) which is responsible for coordinating
NatWest Group’s response across climate-related regulations, risks
and opportunities. The ESG is co-chaired by the Group CEO and
Group Chief Risk Officer.
Risk appetite
NatWest Group’s ambition is to be a leading bank in the UK and the
Republic of Ireland in helping to address climate change. NatWest
Group’s stated purpose is to reduce the climate impact of its financing
activity by at least 50% by 2030 and to do what is necessary to
achieve alignment with the 2015 Paris Agreement.
Work continued in 2020 to integrate climate-related risk into the risk
management framework, including the development of appropriate risk
appetite metrics. Where climate-related risk is deemed to have a
material impact on a particular risk discipline, then changes to policies
and procedures will be made accordingly. Availability of data and the
robustness of risk measurement methodologies will influence the
timing of any proposed changes.
Monitoring and measurement
Plans have been developed to ensure climate-related risks are
considered in the tools made available to risk disciplines for risk
monitoring and measurement purposes.
In 2020, NatWest Group became the first major UK bank to join the
Partnership for Carbon Accounting (PCAF), underlining its
commitment to measuring and reducing its climate impact in
accordance with the 2015 Paris Agreement. Furthermore, in 2020,
NatWest Group also joined the Science Based Targets initiative
(SBTi), following its launch of guidance to support financial institutions
in aligning lending and investment activities with the 2015 Paris
Agreement.
To align NatWest Group’s financing activity with the goals of the 2015
Paris Agreement, work focused on formulating estimated emissions
intensities that are consistent with limiting global warming to well-
below 2°C. Using a sector-based approach, NatWest Group adopted
the Global Greenhouse Gas Accounting & Reporting Standard for the
Financial Industry established by PCAF. In 2020, the residential
mortgage portfolio and three sectors – agriculture (primary farming),
automotive (manufacturers) and oil & gas (extractors) – were
assessed with preliminary emissions intensities estimated for each.
Work is underway to use this early analysis of the three sectors and
NatWest Group’s residential mortgage portfolio to develop actions to
support the transition to a low carbon economy.
Additional activity in 2020 focused on preparation for the Bank of
England’s 2021 Climate Biennial Exploratory Scenario. Scenario
analysis allows NatWest Group to test a range of possible future
climate pathways and understand the nature and magnitude of the
risks they present. The purpose of scenario analysis is not to forecast
the future but to understand and prepare to manage risks that could
arise. During 2020, NatWest Group developed and tested a
methodology to use scenario analysis to quantify the size of a range of
climate-related risks and tested this on a cross section of our
commercial and retail counterparties.
The Board approved the allocation of Senior Management Function
responsibility for identifying and managing financial risks from climate
NatWest Group Annual Report and Accounts 2020
242
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Climate-related financial risk continued
Three scenarios developed by the Network of Central Banks and
Supervisors for Greening the Financial System (NGFS), were used as
the starting point for analysing physical and transition-related climate-
related risk over the period 2020-2050. The impacts of these scenarios
were applied to a sample of the balance sheet comprising wholesale
and retail counterparties. The scenarios were: Hot House World – no
new policy action takes place to reduce greenhouse gas emissions.
This leads to more than 3°C of warming and severe physical risks.
Orderly – immediate and global action to reduce emissions in a
measured way, at a rate that is fast enough to keep climate change
within 2°C with 67% probability; leading to net zero emissions
before 2070.
Disorderly – ambitious new climate policies are introduced, but only
in 2030. Like the Orderly scenario, emissions are sufficiently limited
to keep global warming below 2°C, but the transition is faster as a
result of delayed action.
NatWest Group continues to participate in several industry-wide
initiatives to develop consistent risk measurement methodologies.
NatWest Group is a founding signatory of the United Nations
Environment Programme Finance Initiative (UNEP FI) Principles for
Responsible Banking, which aims to promote sustainable finance
around the globe. In 2020, NatWest Group also took part in Phase II of
the UNEP FI pilot alongside other peer banks. As part of this, an
exploratory climate scenario analysis on future flooding impacts on our
mortgage portfolio was conducted. NatWest Group is also represented
on the Climate Financial Risk Forum established by the PRA and FCA
to shape the financial service industry’s response to the challenges
posed by climate risk.
broader security control environment were made. This included
completion of work in response to the outcome of the 2019 CBEST
test.
NatWest Group’s preparations for Brexit and the end of the
transition period enabled NatWest Group to ensure that its
processes and systems would ensure continuity of service for
customers.
The number of critical customer-impacting incidents continued to
reduce year-on-year. There were eight Criticality 1 incidents
(including COVID-19) in 2020 compared to 14 in 2019.
Governance
A strong operational risk management function is vital to support
NatWest Group’s ambitions to serve its customers better. Improved
management of operational risk against defined appetite is vital for
stability and reputational integrity.
The first line of defence is responsible for managing operational risks
directly while the second line is responsible for proactive oversight and
continuous monitoring of operational risk management across
NatWest Group. The second line is responsible for reporting and
escalating key concerns to Executive Risk Committee and Board Risk
Committee.
Risk appetite
Operational risk appetite supports effective management of material
operational risks. It expresses the level and types of operational risk
NatWest Group is willing to accept to achieve its strategic objectives
and business plans. NatWest Group’s operational risk appetite
statement encompasses the full range of operational risks faced by its
legal entities, businesses and functions.
Operational risk
Definition
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems, or external events. It arises
from day-to-day operations and is relevant to every aspect of the
business.
Mitigation
The Control Environment Certification (CEC) process is a half-yearly
self-assessment by the CEOs of NatWest Group’s principal
businesses, functions and legal entities. It provides a consistent and
comparable view on the adequacy and effectiveness of the internal
control environment.
Sources of risk
Operational risk may arise from a failure to manage operations,
systems, transactions and assets appropriately. This can take the form
of human error, an inability to deliver change adequately or on time,
the non-availability of technology services, or the loss of customer
data. Fraud and theft – as well as the threat of cyber attacks – are
sources of operational risk, as is the impact of natural and man-made
disasters. Operational risk can also arise from a failure to account for
changes in law or regulations or to take appropriate measures to
protect assets.
Key developments in 2020
The impact of COVID-19 led to significant disruption and
heightened the operational risk profile as NatWest Group adapted
to new ways of working as a result of the lockdown protocols. The
control environment was continually monitored to ensure the
resulting challenges were safely addressed.
A NatWest Group-wide response was mobilised – supported by
additional reporting on customer needs, people, processes and
systems – to ensure the Board and senior management were
regularly updated and to facilitate decision-making as COVID-19
evolved.
The transformation agenda was impacted by COVID-19, with some
activities being re-prioritised. A full risk assessment on the impact
of the reprioritised activity was completed to ensure the potential
impacts were understood and mitigated.
Operational resilience remained a key focus. A series of scenarios
– setting out the crystallisation of severe but plausible combinations
of significant risks – were developed in order to support planning
and appropriate forward-looking risk management strategies.
The security threat and the potential for cyber attacks on NatWest
Group’s supply chain remains an area for close monitoring.
Significant enhancements in managing such incidents and the
CEC covers material risks and the underlying key controls, including
financial, operational and compliance controls, as well as supporting
risk management frameworks. The CEC outcomes, including forward-
looking assessments for the next two half-yearly cycles and progress
on control environment improvements, are reported to Group Audit
Committee and Board Risk Committee. They are also shared with
external auditors.
The CEC process helps to ensure compliance with the NatWest Group
Policy Framework, Sarbanes-Oxley 404 requirements concerning
internal control over financial reporting (as referenced in the
compliance report on page 152), and certain requirements of the UK
Corporate Governance Code.
Risks are mitigated by applying key preventative and detective
controls, an integral step in the risk assessment methodology which
determines residual risk exposure. Control owners are accountable for
the design, execution, performance and maintenance of key controls.
Key controls are regularly assessed for adequacy and tested for
effectiveness. The results are monitored and, where a material change
in performance is identified, the associated risk is re-evaluated.
In H1 2020, due to the impacts of COVID-19, the formal certification
process was suspended. It resumed again in H2.
Monitoring and measurement
Risk and control assessments are used across all business areas and
support functions to identify and assess material operational and
conduct risks and key controls. All risks and controls are mapped to
NatWest Group’s Risk Directory. Risk assessments are refreshed at
least annually to ensure they remain relevant and capture any
emerging risks and also ensure risks are reassessed.
NatWest Group Annual Report and Accounts 2020
243
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Risk and capital management
Operational risk continued
The process is designed to confirm that risks are effectively managed
in line with risk appetite. Controls are tested at the appropriate
frequency to verify that they remain fit-for-purpose and operate
effectively to reduce identified risks.
NatWest Group uses the standardised approach to calculate its Pillar 1
operational risk capital requirement. This is based on multiplying three
years’ average historical gross income by coefficients set by the
regulator based on business line. As part of the wider Internal Capital
Adequacy Assessment Process an operational risk economic capital
model is used to assess Pillar 2A, which is a risk-sensitive add-on to
Pillar 1. The model uses historical loss data (internal and external) and
forward-looking scenario analysis to provide a risk-sensitive view of
NatWest Group’s Pillar 2A capital requirement.
Scenario analysis is used to assess how severe but plausible
operational risks will affect NatWest Group. It provides a forward-
looking basis for evaluating and managing operational risk exposures.
Refer to the Capital, liquidity and funding risk section for operational
risk capital requirement figures.
Operational resilience
NatWest Group manages and monitors operational resilience through
its risk and control assessment methodology. This is underpinned by
setting and monitoring risk indicators and performance metrics for key
business services. Progress continues on the response to regulator
expectations on operational resilience, with involvement in a number of
industry-wide operational resilience forums. This enables a more
holistic view of the operational resilience risk profile and the pace of
ongoing innovation and change, both internally and externally.
Fraud
Clients, products and business practices
Execution, delivery and process management
Employment practices and workplace safety
Business disruption and system failures
Event and loss data management
The operational risk event and loss data management process
ensures NatWest Group captures and records operational risk
financial and non-financial events that meet defined criteria. Loss data
is used for regulatory and industry reporting and is included in capital
modelling when calculating economic capital for operational risk. The
most serious events are escalated in a simple, standardised process
to all senior management, by way of a Group Notifiable Event Process.
All financial impacts associated with an operational risk event are
reported against the date they were recorded in NatWest Group’s
financial accounts. A single event can result in multiple losses (or
recoveries) that may take time to crystallise. Losses and recoveries
with a financial accounting date in 2020 may relate to events that
occurred, or were identified in, prior years. NatWest Group purchases
insurance against specific losses and to comply with statutory or
contractual requirements.
Percentage and value of events
Historically, events aligned to the Clients, products and business
practices event category have accounted for the majority of NatWest
Group’s operational risk losses. However, during 2020 several large
provision releases were recorded (that is, previously recorded
provisions were released as they were no longer required). The value
of these outweighed the provisions taken for other conduct-related
matters, hence a negative movement was recorded in this category.
COVID-19 associated operational risk costs impacted upon the trend
of increased losses recorded against the Business Disruption and
System Failures event category. The increase in fraud continues to be
primarily the result of NatWest Group having an increased liability for
reimbursing customers impacted by authorised push payment scams.
£m
2020
88
(48)
11
2
69
122
Value of events
2019 (2)
57
867
20
2
—
946
Proportion
2020
72%
(40%)
9%
2%
57%
100%
2019
6%
92%
2%
—
—
100%
Volume of events (1)
Proportion
2020
94%
1%
3%
1%
1%
100%
2019
91%
4%
4%
1%
—
100%
i
R
s
k
a
n
d
c
a
p
i
t
a
l
Notes:
(1) Based on the volume and value of events (the proportion and cost of operational risk events to NatWest Group) where the associated loss is more than or equal
to £10,000.
(2) The 2019 Clients, products and business practices figure has been restated to reflect the receipt of a reimbursement under indemnification agreements relating
to US residential mortgage-backed securities.
m
a
n
a
g
e
m
e
n
t
Model risk
Definition
Model risk is the potential for adverse consequences arising from
decisions based on model results that may be incorrect,
misinterpreted, used inappropriately or based on an outdated
model. NatWest Group defines a model as a quantitative method,
system, or approach that applies statistical, economic, financial,
accounting, mathematical or data science theories, techniques and
assumptions to process input data into quantitative estimates.
Sources of risk
NatWest Group uses a variety of models in the course of its
business activities. Examples include the use of model outputs to
support customer decisioning, measuring and assessing risk
exposures (including credit, market, and climate risk), as well as
calculating regulatory capital and liquidity requirements. Model
applications may give rise to different risks depending on the
franchise in which they are used. Model risk is therefore assessed
separately for each franchise in addition to the overall assessment
made for NatWest Group.
Key developments in 2020
Progress was made in embedding the model risk framework
across NatWest Group to ensure all models are identified and
managed as per requirements.
Enhanced model risk appetite measures were approved and
monitored throughout 2020, with remediation plans under close
management.
All NatWest Group models are now recorded within a single
model inventory, providing increased transparency.
As a result of COVID-19, there was an increased reliance on
model performance monitoring to identify model limitations and
qualitative overlays to ensure model outputs were used
appropriately.
Initial validations of climate impacting models were conducted
to help the bank better understand the risks associated with the
use of models for this purpose.
NatWest Group Annual Report and Accounts 2020
244
Risk and capital management
Model risk continued
Governance
A governance framework is in place to ensure policies and processes
relating to models are appropriate and effective. Two roles are key to
this – Model Risk Owners and Model Risk Officers. Model Risk
Owners, in the first line, are responsible for model approval and
ongoing performance monitoring. Model Risk Officers, in the second
line, are responsible for oversight, including ensuring that models are
independently validated prior to use and on an ongoing basis aligned
to the model’s risk rating. Model risk matters are escalated to senior
management in several ways. These include model risk oversight
committees, as well as the relevant business and function model
management committees. The Group Model Risk Oversight
Committee provides a direct escalation route to the Group Executive
Risk Committee and, where applicable, onwards to the Group Board
Risk Committee.
Risk appetite
Model risk appetite is set in order to limit the level of model risk that
NatWest Group is willing to accept in the course of its business
activities. It is approved by relevant Executive Risk Committees.
Business areas are responsible for monitoring performance against
appetite and remediating models outside appetite.
Risk controls
Policies and procedures related to the development, validation,
approval and ongoing monitoring of models are in place to ensure
adequate control across the lifecycle of an individual model.
Validation of material models is conducted by an independent risk
function comprised of skilled, well-informed subject matter experts.
This is completed for new models or amendments to existing models
and as part of an ongoing periodic programme to assess model
performance. The frequency of periodic validation is aligned to the risk
rating of the model. The independent validation focuses on a variety of
model features, including modelling approach, the nature of the
assumptions used, the model’s predictive ability and complexity, the
data used in the model, its implementation and its compliance with
regulation.
Risk monitoring and measurement
The level of risk relating to an individual model is assessed through a
model risk rating. A quantitative approach is used to determine the risk
rating of each model, based on the model’s materiality and validation
rating. This approach provides the basis for model risk appetite
measures and enables model risk to be robustly monitored and
managed across the NatWest Group.
Ongoing performance monitoring is conducted by the first line and
overseen by the second line to ensure parameter estimates and model
constructs remain fit for purpose, model assumptions remain valid and
that models are being used consistently with their intended purpose.
This allows timely action to be taken to remediate poor model
performance and/or any control gaps or weaknesses.
Risk mitigation
By their nature – as approximations of reality – model risk is inherent
in the use of models. It is managed by refining or redeveloping models
where appropriate – either due to changes in market conditions,
business assumptions or processes – and by applying adjustments to
model outputs (either quantitative or based on expert opinion).
Enhancements may also be made to the process within which the
model output is used in order to further limit risk levels.
Reputational risk
Definition
Reputational Risk is defined as the risk of damage to stakeholder trust
due to negative consequences arising from internal actions or external
events.
Sources of risk
Reputational risks originate from internal actions and external events.
The three primary drivers of reputational risk have been identified as:
failure in internal execution; a conflict between NatWest Group’s
values and the public agenda; and contagion (when NatWest Group’s
reputation is damaged by failures in the wider financial sector).
Key developments in 2020
Reputational risks arising from COVID-19 remained a key focus
from Q1 onwards.
A review of the reputational risk framework and policy began in
2020. This was required to reflect the purpose, capture a more
complete view of reputation at a strategic level and align with more
progressive industry leaders.
The correlation between reputational risk and climate change
issues remained a significant area of focus, supported by work to
enhance the consideration of such issues within the reputational
risk framework. As part of this work, enhancements were made to
the Environmental, Social & Ethical risk management framework to
mitigate reputational risk from carbon intensive sectors and support
the transition to a lower carbon economy.
Governance
A reputational risk policy supports reputational risk management
across NatWest Group. Reputational risk committees review relevant
issues at an individual business or entity level, while the Reputational
Risk Committee – which has delegated authority from the Executive
Risk Committee – opines on cases, issues, sectors and themes that
represent a material reputational risk. The Board Risk Committee
oversees the identification and reporting of reputational risk. The
Sustainable Banking Committee has a specific focus on
environmental, social and ethical issues.
Risk appetite
NatWest Group manages and articulates its appetite for reputational
risk through a qualitative reputational risk appetite statement and
quantitative measures. NatWest Group seeks continuous improvement
in the identification, assessment and management of customers,
transactions, products and issues that present a material reputational
risk.
Standards of conduct are in place across NatWest Group requiring
strict adherence to policies, procedures and ways of working to ensure
business is transacted in a way that meets – or exceeds – stakeholder
expectations.
Monitoring and measurement
Relevant internal and external factors are monitored through regular
reporting to the reputational risk committees at business or entity level
and escalated, where appropriate, to the Reputational Risk
Committee, Board Risk Committee or the Sustainable Banking
Committee.
Mitigation
Reputational risk is mitigated through the policy and governance
framework, with ongoing staff training to ensure early identification,
assessment and escalation of material issues. External events that
could cause reputational damage are identified and mitigated through
NatWest Group’s top and emerging risks process. The most material
threats to NatWest Group’s reputation continued to originate from
historical and more recent conduct issues. NatWest Group has in
recent years been the subject of investigations and reviews by a
number of regulators and governmental authorities, some of which
have resulted in past fines, settlements and public censure. Refer to
the Litigation and regulatory matters section of Note 26 to the
consolidated financial statements for details of material matters
currently impacting NatWest Group.
NatWest Group Annual Report and Accounts 2020
245
i
R
s
k
a
n
d
c
a
p
i
t
a
l
m
a
n
a
g
e
m
e
n
t
Page
247
258
259
260
261
263
264
269
269
270
272
276
280
281
283
283
284
289
292
299
301
302
303
304
304
305
306
307
309
311
312
313
314
320
320
320
321
321
322
322
323
Financial statements
Independent auditor’s report
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated cash flow statement
Accounting policies
Notes to the consolidated accounts
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
NatWest Group plc financial statements and notes
Net interest income
Non-interest income
Operating expenses
Segmental analysis
Pensions
Auditor’s remuneration
Tax
Earnings per share
Trading assets and liabilities
Derivatives
Financial instruments - classification
Financial instruments - valuation
Financial instruments - maturity analysis
Loan impairment provisions
Other financial assets
Intangible assets
Other assets
Other financial liabilities
Subordinated liabilities
Other liabilities
Share capital and other equity
Leases
Structured entities
Asset transfers
Capital resources
Memorandum items
Analysis of the net investment in business interests and intangible assets
Analysis of changes in financing during the year
Analysis of cash and cash equivalents
Directors’ and key management remuneration
Transactions with directors and key management
Related parties
Post balance sheet events
NatWest Group Annual Report and Accounts 2020
246
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Independent auditors’ report to the members of NatWest Group plc
Opinion
In our opinion:
the financial statements of NatWest Group plc (the ‘Parent Company’) and its subsidiaries (together, the ‘Group’) give a true and fair view of
the state of the Group’s and of the Parent Company’s affairs as at 31 December 2020 and of the Group’s loss for the year then ended;
the Group financial statements have been properly prepared in accordance with International Accounting Standards in conformity with the
requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No.
1606/2002 as it applies in the European Union;
the Parent Company financial statements have been properly prepared in accordance with International Accounting Standards in conformity
with the requirements of the Companies Act 2006 as applied in accordance with section 408 of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements (see table below) of the Parent Company and the Group for the year ended 31 December 2020 which
comprise:
Parent Company
Balance sheet as at 31 December 2020;
Statement of changes in equity for the year then ended;
Cash flow statement for the year then ended; and
Related notes 1 to 12 to the financial statements including a
summary of critical accounting policies.
Group
Consolidated balance sheet as at 31 December 2020;
Consolidated income statement for the year then
ended;
Consolidated statement of comprehensive income for
the year then ended;
Consolidated statement of changes in equity for the
year then ended;
Consolidated cash flow statement for the year then
ended;
Accounting policies;
Related Notes 1 to 33 to the financial statements;
Annual report on remuneration indicated by a bracket in
the margins;
Risk and capital management section of the Business
review indicated by a bracket in the margins.
The Capital Requirements (Country-by-Country
Reporting) Regulations report identified as ‘audited’.
The financial reporting framework that has been applied in their preparation is applicable law and International Accounting Standards in
conformity with the requirements of the Companies Act 2006 and, as regards to the group financial statements, International Financial Reporting
Standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union and as regards the Parent Company
financial statements, as applied in accordance with section 408 of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are
independent of the Group and Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the
financial statements is appropriate. Our evaluation of the directors’ assessment of the Group and Parent Company’s ability to continue to adopt
the going concern basis of accounting included:
In conjunction with our walkthrough of the Group’s financial close process, we confirmed our understanding of management’s Going
Concern assessment process and also engaged with management early to ensure all key factors were considered in their assessment;
We evaluated management’s going concern assessment which included reviewing their evaluation of long-term business and strategic
plans, capital adequacy, liquidity and funding positions. It also assessed these positions considering internal stress tests which included
consideration of principal and emerging risks. The Group’s risk profile and risk management practices were considered including credit risk,
market risk, compliance and conduct risk, and operational risk;
We evaluated management’s assessment by considering viability under different scenarios including the impact of the Group’s strategic
plans and the economic impact of COVID-19. We used economic specialists in assessing the macroeconomic assumptions in the forecast
through benchmarking to institutional forecasts, HMT consensus and peer comparative economic forecasts. We also considered other
commitments of the Group including those in respect of its subsidiaries;
We considered the Group’s operational resilience and their response to the impact COVID-19 had on its business operations, including the
operations of its third party providers; and
We reviewed the Group’s going concern disclosures included in the annual report in order to assess that the disclosures were appropriate
and in conformity with the reporting standards.
NatWest Group Annual Report and Accounts 2020
247
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Independent auditors’ report to the members of NatWest Group plc
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the group and parent company’s ability to continue as a going concern for a period up to 19 February
2022 being not less than twelve months from when the financial statements are authorised for issue.
In relation to the group and parent company’s reporting on how they have applied the UK Corporate Governance Code, we have nothing
material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it
appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as
a going concern.
An overview of the scope of the Parent Company and Group audits
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each
company within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account
the size and risk profile of the component and its activities, the organisation of the Group and effectiveness of group-wide controls, changes in
the business environment and other factors such as recent internal audit results when assessing the level of work to be performed at each
component.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of
significant accounts in the financial statements, of the five reporting components of the Group, we selected four components based on size and
risk, which represent the principal reporting legal entities within the Group.
The scoping for the current year is as follows:
Component
NatWest Holdings (NWH)
NatWest Markets (NWM)
RBS International
RBS AA Holdings
Scope
Key locations
Full
Full
Specific
Specific
United Kingdom
United Kingdom, United States, and Netherlands
Channel Islands
United Kingdom
The table below illustrates the coverage obtained from the work performed by our audit teams. We considered total assets, total equity and total
income to verify we had appropriate overall coverage.
Total assets
Total equity
Total income
Notes:
Full scope: audit procedures on all significant accounts.
(1)
(2)
Specific scope: audit procedures on selected accounts.
(3) Other procedures: considered in analytical procedures.
Full scope (1)
Specific scope (2)
Other procedures (3)
95%
92%
92%
5%
8%
3%
-
-
5%
Total
100%
100%
100%
The audit scope of Specific scope components may not have included testing of all significant accounts within the component. However, the
testing will have contributed to the total coverage of significant accounts tested for the overall Group.
As a result of the COVID-19 outbreak and resulting lockdown restrictions in all of the countries where full or specific scope audit procedures
have been performed, we have modified our audit strategy to allow for the audit to be performed remotely at both the Group and component
locations. This approach was supported through remote user access to the Group’s financial systems and the use of EY software collaboration
platforms for the secure and timely delivery of requested audit evidence.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the
components by us, as the primary audit engagement team, or by component auditors from other EY global network firms operating under our
instruction.
The primary audit engagement team interacted regularly with the component audit teams where appropriate throughout the course of the audit,
which included holding planning meetings, maintaining regular communications on the status of the audits, reviewing key working papers and
taking responsibility for the scope and direction of the audit process. The primary audit team continued to follow a programme of oversight visits
that has been designed to ensure that the Senior Statutory Auditor, or another Group audit partner, visits all full scope and specific scope
locations. During the current year’s audit cycle, due to COVID-19, the visits undertaken by the primary audit team were necessarily virtual visits.
These visits involved video call meetings with local management, and discussions on the audit approach with the component team and any
issues arising from their work. The primary team interacted regularly with the component teams and maintained a continuous and open dialogue
with component teams, as well as holding formal closing meetings quarterly, to ensure that the primary team were fully aware of their progress
and results of their procedures. The primary team also reviewed key working papers and were responsible for the scope and direction of the
audit process. This, together with the additional procedures at Group level, gave us appropriate evidence for our opinion on the Group financial
statements
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the
current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These
matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the
efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our
opinion thereon, and we do not provide a separate opinion on these matters.
NatWest Group Annual Report and Accounts 2020
248
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Independent auditors’ report to the members of NatWest Group plc
Risk
Expected Credit Loss Provisions
At 31 December 2020 the Group reported
total gross loans of £372.4 billion (2019:
£336.8 billion) and £6.2 billion of
expected credit losses (ECL) (2019: £3.8
billion).
Management’s judgements and estimates
are especially subjective due to significant
uncertainty associated with the
assumptions used. Uncertainty associated
with COVID-19 and its consequent
implications including lockdowns and
recovery assumptions as well as
government intervention, increased the
level of judgement in ECL. Assumptions
with increased complexity in respect of the
timing and measurement of ECL include:
Staging - Allocation of assets to stage
1, 2, or 3 on a timely basis using
criteria in accordance with IFRS 9
considering the impact of COVID-19
and related government support
measures, such as payment deferrals,
on customer behaviours and the
identification of underlying significant
deterioration in credit risk;
Model estimations - Accounting
interpretations, modelling assumptions
and data used to build and run the
models that calculate the ECL
considering the impact of COVID-19
on model performance and any
additional data to be considered in the
ECL calculation;
Economic scenarios - Inputs,
assumptions and weightings used to
estimate the impact of multiple
economic scenarios particularly those
influenced by COVID-19 and Brexit
including any changes to scenarios
required through 31 December 2020;
Adjustments - Appropriateness,
completeness and valuation of model
adjustments including any COVID-19
specific adjustments due to the
increased uncertainty and less reliance
on modelled outputs which increases
the risk of management override;
Individual provisions - Measurement of
individual provisions including the
assessment of multiple scenarios
considering the impact of COVID-19
on exit strategies, collateral valuations
and time to collect; and
Disclosure - The completeness and
preparation of disclosures considering
the key judgments, sources of data
and the design of the disclosures.
Our response to the risk
Controls testing: We evaluated the design and operating effectiveness of controls across the
processes relevant to ECL, including the judgements and estimates noted. These controls,
among others, included
the allocation of assets into stages including management’s monitoring of stage
effectiveness;
recording and approval of payment deferrals and government supported lending such as
bounce back loans and Coronavirus Business Interruption Loan Schemes (CBILs);
model governance including monitoring, the governance and review of both in-model
adjustments and post model adjustments and model validation;
data accuracy and completeness;
credit monitoring;
multiple economic scenarios;
individual provisions and
production of journal entries and disclosures.
In evaluating the governance process, we observed the executive finance and risk committee
meetings where the inputs, assumptions and adjustments to the ECL were discussed and
approved, among other procedures.
We performed an overall assessment of the ECL provision levels by stage to assess if they were
reasonable by considering the overall credit quality of the Group’s portfolios, risk profile, impact
of the COVID-19 including geographic considerations and high risk industries, the impact
government support measures, such as payment deferrals, may have had on delaying expected
defaults, credit risk management practices and the macroeconomic environment by considering
trends in the economy and industries to which the Group is exposed. We also considered the
appropriateness of provisions applied to government supported lending such as bounce back
loans and CBILs which included assessing the respective eligibility criteria. We performed peer
benchmarking where available to assess overall staging and provision coverage levels. For a
sample of industries, we also assessed the ECL against an independently developed
methodology estimating unsustainable debt levels.
Based on our assessment of the key judgements we used specialists to support the audit team
in the areas of economics, modelling and, collateral and business valuations.
Staging: We evaluated the criteria used to allocate a financial asset to stage 1, 2 or 3 in
accordance with IFRS 9; this included peer benchmarking to assess staging levels. We
recalculated the assets in stage 1, 2 and 3 to assess if they were allocated to the appropriate
stage and performed sensitivity analysis to assess the impact of different criteria on the ECL and
also considered the impact of performing collective staging downgrades to industries and
geographic regions particularly impacted by COVID-19.
To test credit monitoring which drives the probability of default estimates used in the staging
calculation, we recalculated the risk ratings for a sample of performing loans and focused our
testing on high risk industries impacted by COVID-19. We also assessed the timing of the
annual review performed by management on each wholesale loan exposure to evaluate whether
it appropriately considered COVID-19 risk factors by considering independent publicly available
information.
Model estimations - We performed a risk assessment on all models involved in the ECL
calculation to select a sample of models to test. We involved modelling specialists to assist us to
test this sample of ECL models by testing the assumptions, inputs and formulae used. This
included a combination of assessing the appropriateness of model design and formulae used,
alternative modelling techniques, recalculating the Probability of Default, Loss Given Default and
Exposure at Default, and model implementation. We also considered the results of internal
model validation results.
To evaluate data quality, we agreed a sample of ECL calculation data points to source systems,
including balance sheet data used to run the models and historic loss data to monitor models.
We also tested the ECL data points from the calculation engine through to the general ledger
and disclosures. We included COVID-19 specific data points in this testing.
Economic scenarios - We involved economic specialists to assist us to evaluate the base case
and alternative economic scenarios, including evaluating probability weights and comparing
these to other scenarios from a variety of external sources. This assessment included the latest
developments related to COVID-19 and Brexit at 31 December 2020, including the
announcement of planned vaccines. We assessed whether forecasted macroeconomic
variables were complete and appropriate, such as GDP, unemployment rate, interest rates and
the House Price Index. With the support of our modelling specialists we evaluated the
correlation and translation of the macroeconomic factors to the ECL.
NatWest Group Annual Report and Accounts 2020
249
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Independent auditors’ report to the members of NatWest Group plc
Risk
Expected Credit Loss Provisions continued
Our response to the risk
Adjustments - We tested material in-model and post-model adjustments including those which
were applied as a result of COVID-19. With our modelling specialists, we assessed the
completeness of these adjustments and their appropriateness by considering the data,
judgments, methodology, sensitivities, and governance of these adjustments as well as
considering model shortcomings.
Individual provisions - We involved valuation specialists to recalculate a sample of individual
provisions including the alternative scenarios and evaluating probability weights assigned. The
sample was based on a number of factors, including higher risk sectors such as commercial real
estate, retail, leisure and aviation, and materiality. We considered the impact COVID-19 had on
collateral valuations and time to collect as well as whether planned exit strategies remained
viable.
Disclosure - We tested the data flows used to populate the disclosures and assessed the
adequacy of disclosures for compliance with the accounting standards and regulatory
considerations including expectations of COVID-19 specific disclosures.
Key observations communicated to the Group Audit Committee
We are satisfied that provisions for the impairment of loans were reasonable and recognised in accordance with IFRS 9. We highlighted the
following matters to the Group Audit Committee:
Overall provision levels were reasonable which also considered available peer information and our understanding of the credit
environment;
Our testing of models and model assumptions identified some instances of under estimation. We aggregated these differences and were
satisfied that the overall estimate recorded was reasonable;
The in-model and post-model adjustments applied were reasonable and addressed model shortcomings identified;
We recalculated the staging of all retail and wholesale exposures in material portfolios and noted no material differences. We also
performed sensitivity analysis on the staging criteria and noted that substantial changes would be needed to the criteria to result in a
material difference;
For individually assessed impairments, in a few instances we reported judgemental differences in respect of the extent of the impairment
identified, however, none of these differences were considered material; and
We noted improvements to the governance framework throughout the year to respond to the challenges posed by COVID-19. Control
deficiencies were identified, particularly in data processes and models where compensating controls were identified and operated effectively.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Credit Risk section of the Risk and capital management section
Accounting policies
Note 14 on the financial statements
NatWest Group Annual Report and Accounts 2020
250
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Independent auditors’ report to the members of NatWest Group plc
Our response to the risk
Risk
Impairment of goodwill and deferred tax assets and, in the parent company accounts, investments in group undertakings.
At 31 December 2020, the Group had reported
goodwill of £5.6 billion (2019: £5.6 billion) and
deferred tax assets of £0.6 billion (2019: £0.7
billion). The parent company has reported
investments in group undertakings of £46.2
billion (2019: £55.8 billion).
Controls testing: We evaluated the design and operating effectiveness of controls over the
preparation and review of the forecasts, the significant assumptions (such as discount
rate and long-term growth rate) used in the value in use model, inputs, calculations,
methodologies and judgements. This included testing controls over the selection of
macroeconomic assumptions in addition to revenue and cost projections, as well as the
precision applied to these. In evaluating the governance processes we reviewed the
Board meeting materials and minutes where forecasts were discussed and approved, and
we observed the committee meetings where the value in use model and outcomes were
discussed and approved.
The recognition and carrying value of deferred
tax assets, goodwill and, in the parent company
accounts, investments in group undertakings
are based on estimates of future profitability,
which require significant management
judgement and include the risk of management
bias. The recognition of deferred tax assets
considers the future profit forecasts of the legal
entities as well as interpretation of recent
changes to tax rates and laws.
Judgements and especially challenging,
complex and subjective assumptions that are
difficult to audit due to the forward-looking
nature and inherent uncertainties associated
with such assumptions include:
Revenue forecasts which are also impacted
by delivery of the Group’s Strategy
Cost forecasts in particular given the
intention to significantly reduce costs over
time;
Macroeconomic and model assumptions
used in the recoverability and valuation
assessments (discount rates, growth rates,
macroeconomic assumptions) including
assumptions regarding the economic
consequences of COVID -19, Brexit and
other political developments over an
extended period.
Disclosure adequacy including key
assumptions, the sensitivity of changes to
these assumptions as well as an
explanation of the impairment testing
performed.
Macroeconomic and model assumptions: With the support of our internal economic
specialists, we tested whether macroeconomic assumptions, including the impact of
COVID-19, the outcome of Brexit and other geopolitical considerations at 31 December
2020, used in the Group’s forecasts were reasonable by comparing these to other
scenarios from a variety of external sources. We evaluated how the discount rates and
long-term growth rates used by management compared to our ranges which were
assessed using peer practice, external market data and calculations performed by our
valuation specialists.
Revenue forecasts: We evaluated the underlying business strategies, comparing to
expected market trends and considering anticipated balance sheet growth. We obtained
an understanding of the Group’s strategy and considered its expected impact on the
forecasts and the extent to which decisions had been factored into the forecasts, where
appropriate, in accordance with the relevant accounting standards.
We also inspected the findings from the review performed by management including their
own sensitivity analysis of the forecasts.
Cost forecasts: We tested how previous management forecasts, including the impact of
cost reduction programmes, compared to actual results to evaluate the accuracy of the
forecasting process. We involved our cost transformation specialists to assist us in
assessing the achievability of future cost reduction plans by evaluating the details of the
underlying initiatives and how cost ratios compared to peer banks and commentaries from
external analysts.
Sensitivity analysis: We evaluated how management considered alternative assumptions
and performed our own sensitivity and scenario analyses on certain assumptions such as
cost and revenue forecasts, discount rate and long-term growth rate on both the detailed
forecasts and on a stand back basis.
Disclosure: We evaluated the adequacy of disclosures in the financial statements
including the appropriateness assumptions and sensitivities disclosed. We tested the data
and calculations included in the disclosures.
Key observations communicated to the Group Audit Committee
We are satisfied that management methodologies, judgements and assumptions supporting the carrying value of goodwill, deferred tax
assets and, in the parent company accounts, investments in group undertakings, were reasonable and in accordance with IFRS. We
highlighted the following matters to the Group Audit Committee:
There is inherent uncertainty in predicting revenue and costs over the five-year forecast period, particularly with respect to the impact of
COVID-19 and a continuing low interest rate environment, the achievement of new strategic objectives, execution risk in the planned
cost reductions, the impact of regulatory and climate change developments, and the impact of competition and disruption in banking
business models over an extended period.
Our stress testing on Commercial goodwill indicated that it is the most at risk of impairment based on the level of headroom and the
various scenario analyses performed. We are, however, satisfied that management’s conclusion that the goodwill is recoverable as at
31 December 2020 is appropriate and that they have adequately disclosed reasonably possible alternative scenarios relating to the key
assumptions that could result in an impairment.
The directors’ impaired NatWest Group’s investment in NWH and NWM, with there being no further headroom available. The sensitivity
analyses we reviewed and our independent procedures supported these assessments.
We are satisfied that the disclosures appropriately reflect the sensitivity of the carrying value of investments in group undertakings and
goodwill to certain reasonable alternative outcomes. As there are a number of other possible outcomes and it would be impracticable to
estimate the effect of all of them, the directors have disclosed the uncertainty that other possible outcomes within the next financial year
could require an adjustment to the carrying amount of investments in group undertakings and goodwill.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 7 and Note 16 on the Group financial statements and Note 9 on the Parent company financial statements
NatWest Group Annual Report and Accounts 2020
251
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Independent auditors’ report to the members of NatWest Group plc
Risk
Provisions for conduct and litigation claims
At 31 December 2020, the Group has reported
£1.9 billion (2019: £2.7 billion) of provisions for
liabilities and charges, including £1.1 billion
(2019: £1.9 billion) for conduct and litigation
claims, including Payment Protection Insurance
(PPI) as detailed in Note 20 of the financial
statements.
Regulatory scrutiny and the continued litigious
environment give rise to a high level of
management judgement in determining
appropriate provisions and disclosures.
Management judgement is needed to
determine whether a present obligation exists,
and a provision should be recorded at 31
December 2020 in accordance with the
accounting criteria set out under IAS 37.
The most significant areas of judgement are:
Judgement and risk of management bias -
Auditing the adequacy of these provisions
is complex because judgement is involved
in the selection and use of assumptions
(such as expected claim rates, legal costs,
and the timing of settlement) in the
estimation of material provisions and there
is a risk of management bias in the
determination of whether an outflow in
respect of identified material conduct or
legal matters is probable and can be
estimated reliably; and
Disclosure - Judgement is required to
assess the adequacy of disclosures of
provision for contingent liabilities given the
underlying estimation uncertainty in the
provisions.
Our response to the risk
Controls testing: We evaluated the design and operating effectiveness of controls over
the identification, estimation, monitoring and disclosure of provisions related to legal and
conduct matters considering the potential for management override of controls. The
controls tested, among others, included those to identify and monitor claims, determine
when a provision is required and to ensure the completeness and accuracy of data used
to estimate provisions.
Examination of regulatory correspondence: Among other procedures, we examined the
relevant regulatory and legal correspondence to assess developments in certain cases.
We also considered regulatory developments to identify actual or possible non-
compliance with laws and regulations that might have a material effect on the financial
statements. For cases which were settled during the period, we compared the actual
outflows with the provision that had been recorded, considered whether further risk
existed, and evaluated the level of disclosures provided.
Inquiry of legal counsel: For significant legal matters, we received confirmations from the
Group’s external legal counsel for significant matters to evaluate the existence of the
obligation and management’s estimate of the outflow at year-end. We also conducted
inquiries with internal legal counsel over the existence of the legal obligations and related
provision. We performed a test for unrecorded provisions to assess if there were cases
not considered in the provision estimate by assessing against external legal confirmations
and discussing with internal counsel.
Testing of assumptions: Where appropriate, we involved our conduct risk specialists to
assist us in evaluating the provision. We tested the underlying data and assumptions
used in the determination of the provisions recorded, including expected claim rates, legal
costs, and the timing of settlement. We considered the accuracy of management’s
historical estimates and peer bank settlement in similar cases by comparing the actual
settlement to the provision. We assessed the reasonableness of the assumptions used
by management by comparing to the results of our independently performed
benchmarking and sensitivity analysis. We also developed our own range of reasonable
alternative estimates and compared them to management’s provision. We tested
utilisations of the PPI provision during the year and assessed the sufficiency of the
remaining provision for PPI customer redress yet to be paid.
Disclosure: We evaluated the disclosures provided on conduct, litigation, regulatory,
customer remediation and claims provisions to assess whether they complied with
accounting standards.
Key observations communicated to the Group Audit Committee
We are satisfied that provisions for conduct, litigation and regulatory matters, customer remediation and claims are reasonable and
recognised in accordance with IFRS. We concurred with the recognition, measurement and level of disclosures of other conduct and litigation
provisions. We did not identify any material unrecorded provisions. We communicated the following matters to the Group Audit Committee:
The level of provisions by their nature incorporate significant judgements to be made and may change as a result of future developments.
Continued vigilance in assessing conduct risks from the impact of COVID-19, which may not manifest until well after the pandemic has
passed.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Accounting policies
Note 20 and 26 on the financial statements
NatWest Group Annual Report and Accounts 2020
252
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Independent auditors’ report to the members of NatWest Group plc
Our response to the risk
Risk
Valuation of financial instruments with higher risk characteristics including related income from trading activities
As reported in note 12 to the financial
statements, as at 31 December 2020 the
company held financial instruments that did not
trade in active markets. This included reported
level 3 assets of £1.7 billion (2019: £2.5 billion)
and level 3 liabilities of £0.9 billion (2019: £1.3
billion) whose value is dependent upon
unobservable inputs.
Controls testing: We evaluated the design and operating effectiveness of controls
relating to financial instrument valuation and related income statement measurement
including independent price verification, model review and approval, collateral
management, and income statement analysis. We also observed the NatWest Group
Executive Valuation and NWM Valuation Committees where valuation inputs,
assumptions and adjustments were discussed and approved.
Substantive testing: Among other procedures, we involved our financial instrument
valuation and modelling specialists to assist us in performing procedures including the
following:
The valuation of those financial instruments with
higher risk characteristics involves both
significant judgement and the risk of
inappropriate revenue recognition through
incorrect pricing as outlined below. The
judgement in estimating fair value of these
instruments can involve complex valuation
models and significant fair value adjustments,
both of which may be reliant on data inputs
where there is limited market observability.
Management’s estimates which required
significant judgement include:
Complex models - Complex model-dependent
valuations, which include interest rate swaps
linked to pre-payment behaviour and interest
rate and foreign exchange options with exotic
features; such as those having multiple call
dates and variable notional amounts;
Illiquid inputs - Pricing inputs and calibrations
for illiquid instruments, including rarely traded
debt securities. Additionally, derivative
instruments whose valuation is dependent
upon discount rates associated with complex
collateral arrangements; and
Fair value adjustments - The appropriateness
and completeness of fair value adjustments
made to derivatives including Funding
Valuation Adjustments (FVA) and Credit
Valuation Adjustments (CVA) relating to
derivative counterparties whose credit spread
is not directly market observable, and material
product and deal specific adjustments on long
dated derivative portfolios.
The impact of COVID-19 on the valuation of
different financial instrument portfolios
Testing complex model-dependent valuations by performing independent
calculations to assess the appropriateness of models and the adequacy of
assumptions and inputs used by the Group;
Independently re-pricing instruments that had been valued using illiquid pricing
inputs, using alternative pricing sources to evaluate management’s valuation;
Comparing fair value adjustment methodologies to current market practice and
assessing the appropriateness and adequacy of the valuation adjustment framework
in light of emerging market practice; and
Revaluing a sample of counterparty level FVA and CVAs, comparing funding
spreads to third party data and independently challenging illiquid CVA inputs.
We also assessed whether there were any indicators of aggregate bias in financial
instrument marking
Throughout the year we considered the impact of COVID-19 on the valuation of the
different financial instrument portfolios, particularly where markets were affected by
heightened volatility. Wherever this resulted in changes in management’s marking
approach we assessed the reasonableness of these changes as well as the design and
operating effectiveness of associated key controls.
Comparing against historic and forecast activity: We performed back-testing analysis of
recent trade activity to evaluate the drivers of significant differences between book value
and trade value and to assess the impact on the fair value of similar instruments within
the portfolio. We also obtained and assessed the appropriateness of management’s
estimate of 2021 budgeted losses in respect of asset disposals and risk reduction
transactions and considered any impact on fair values at year-end and relevant
disclosures. The assessment included back-testing 2020 budgeted losses against
realised asset disposals and risk reduction transactions. We performed an analysis of
significant disagreements with counterparty collateral calls to assess the potential
impact on the fair value of the underlying (and similar) financial instruments.
Key observations communicated to the Group Audit Committee
We are satisfied that the assumptions used by management to reflect the fair value of financial instruments with higher risk characteristics
and the recognition of related income is reasonable and in accordance with IFRS. We highlighted the following matters to the Group Audit
Committee:
Complex-model dependent valuations were appropriate based on the output of our independent re-valuations, analysis of trade
activity and peer benchmarking;
The fair value estimates of hard-to-price portfolios appropriately reflected pricing information available at 31 December 2020; and
Valuation adjustments applied on derivative portfolios for credit, funding and other risks were appropriate and complete based on our
assessment of trade activity for positions with common risk characteristics, analysis of market data and peer benchmarking.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Accounting policies
Note 12 on the financial statements
NatWest Group Annual Report and Accounts 2020
253
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Independent auditors’ report to the members of NatWest Group plc
Risk
Pension valuation and net pension asset
The Group operates a number of defined benefit
schemes which in aggregate are significant in the
context of the overall balance sheet. At 31
December 2020, the Group reported a net
pension asset of £602 million (2019: £495 million)
comprising £723 million of schemes in surplus
and £121 million of schemes in deficit (2019:
£614 million and £119 million respectively). The
net pension asset is sensitive to changes in the
key judgements and estimates, which include:
Assumptions -Actuarial assumptions and
inputs including discount rate, inflation,
pension payment and longevity to determine
the valuation of retirement benefit liabilities;
Valuations - Pricing inputs and calibrations
for illiquid or complex model-dependent
valuations of certain investments held by the
schemes;
Augmentation cap - Quantification of
trustee’s rights to unilaterally augment
benefits (Augmentation cap) to determine the
recognition of surplus;
Equalisation adjustments - due to court
rulings in respect of Guaranteed Minimum
Pensions (GMP).
Our response to the risk
Controls testing - We evaluated the design and operating effectiveness of controls
over the actuarial assumptions setting process, the data inputs used in the actuarial
calculation and the measurement of the fair value of the schemes’ assets.
Assumptions - We involved actuarial specialists to evaluate the actuarial assumptions
(including the impact from the recent government announcement of RPI/CPIH transition)
by comparing them to independently obtained third party sources and market practice.
We assessed the impact on pension liabilities due to changes in financial, demographic
and longevity assumptions over the year, including the effects of COVID-19, and
whether these were supported by objective external evidence and rationales.
Valuations - We involved valuation specialists to assess the appropriateness of
management’s valuation methodology including the judgements made in determining
significant assumptions, including their consideration of the impact of COVID-19, used in
the valuation of complex and illiquid pension assets. We tested the fair value of scheme
assets by independently calculating fair value for a sample of the assets held. Our
sample included cash, equity and debt instruments, derivative financial instruments and
illiquid assets.
Augmentation cap and equalisation adjustments - We involved actuarial specialists
to test the estimation of the augmentation cap and GMP equalisation adjustments
including the inputs used in the calculation. We also assessed the methodology and
judgements made in calculating these estimates and the associated accounting
treatment in accordance with IAS 19 and IFRIC 14.
Disclosure - We assessed the adequacy of the disclosures made in the financial
statements, including the appropriateness of the assumptions and sensitivities
disclosed.
Key observations communicated to the Group Audit Committee
We are satisfied that the valuation and disclosure of the net pension balance are reasonable and in accordance with IFRS. We highlighted
the following matters to the Group Audit Committee:
Our benchmarking of key actuarial assumptions including the discount rate, inflation, longevity and pension payments concluded
that assumptions were within a reasonable range;
No material differences were identified through our independent valuation testing for a sample of pension assets; and
Management’s estimate of the impact of the GMP liability and augmentation cap was materially consistent with our independent estimate
using our own model.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 5 on the financial statements
NatWest Group Annual Report and Accounts 2020
254
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Independent auditors’ report to the members of NatWest Group plc
Risk
IT access management
The IT environment is complex and pervasive to
the operations of the Group due to the large
volume of transactions processed in numerous
locations daily and the reliance on automated
and IT dependent manual controls. Appropriate
IT controls are required to ensure that
applications process data as expected and that
changes are made in an appropriate manner.
This risk is also impacted by the greater
dependency on third-parties, increasing use of
cloud platforms, decommissioning of legacy
systems, and migration to new systems. Such
controls contribute to mitigating the risk of
potential fraud or errors as a result of changes
to applications and data.
Controls
User access management across application,
database and operating systems. We have
identified user access deficiencies in the past
and while the number of deficiencies has
reduced year over year, there remains a risk
of inappropriate access.
Our response to the risk
We evaluated the design and operating effectiveness of IT general controls over the
applications, operating systems and databases that are relevant to financial reporting.
During our planning and test of design phases, we performed procedures to determine
whether the ongoing global COVID-19 pandemic had caused material changes in IT
processes or controls and noted no such changes that would result in an increased IT
risk.
Controls testing
We tested user access by assessing the controls in place for in-scope applications and
verifying the addition and periodic recertification of users’ access. During 2020, the
Group consolidated their access management tools and moved further in-scope
application onto a strategic platform (SLX) which will facilitate most of the Group’s
Manage Access IT General Controls across applications and infrastructure platforms.
We performed procedures around the transition process between IT tools, focusing on
the completeness of user data and the adequacy of the control environment.
A number of systems are outsourced to third party service providers. For these systems,
we tested IT general controls through evaluating the relevant Service Organisation
Controls reports (where available). This included assessing the timing of the reporting,
the controls tested by the service auditor and whether they address relevant IT risks and
the impact COVID-19 had on the overall control environment. We also tested required
complementary user entity controls performed by management. Where a SOC report
was not available we identified and reviewed compensating business controls to
address this risk.
Where control deficiencies were identified, we tested remediation activities performed by
management and compensating controls in place and assessed what additional testing
procedures were necessary to mitigate any residual risk.
Key observations communicated to the Group Audit Committee
We are satisfied that IT controls impacting financial reporting are designed and operating effectively. The following matters were reported to
the Group Audit Committee:
We have seen an overall reduction in the number of discrete IT control deficiencies identified compared to prior year.
Improvements were made to standardise access management processes and controls across the Group. However, particular attention
should continue to be paid to controls over user access management including ensuring the completeness and accuracy of the data used
to perform access controls. Where issues were noted in relation to access management these were remediated by year end or mitigated
by compensating controls. We also performed additional testing in response to deficiencies identified, where required.
For a robust control environment, the Group should seek to build and end-to-end view of controls across both infrastructure and
application layers, including documentation of automated business controls, and IT general controls at the application layer.
A high volume of control deficiencies had been remediated prior to year end, and the remaining compensated for, however, we have seen
examples where further diligence could be applied to ensure consistent and continued effective control operation.
In the prior year, our auditor’s report included a key audit matter in relation to Recycling of foreign exchange reserve triggered by Alawwal bank
merger and liquidation of RFS Holding BV during 2019. We did not consider this to be a key audit matter in the current year as the materiality of
foreign exchange reserves decreased significantly. .
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in
forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic
decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £160 million (2019: £160 million), which is 5% (2019: 5%) of the loss before tax of the Group of
£351 million (2019: profit before tax of the Group of £4,232 million) adjusted for certain loan impairment charges arising from COVID-19, loss on
redemption of own debt, non-recurring conduct expenses and strategic costs. The largest impact was an adjustment of £2.5 billion to reflect pre-
COVID-19 loan impairment charges, using 2019 as a basis. We believe removing items that would otherwise have a disproportionate impact on
materiality reflects the most useful measure for users of the financial statements and is consistent with the prior year. The 5% basis used for
Group materiality is consistent with the wider industry, and is the standard for listed and regulated entities.
We determined materiality for the Parent Company to be £160 million (2019: £160 million) which is 0.4% (2019: 0.3%) of equity of the Parent
Company and is consistent with the prior year. We believe this reflects the most useful measure for users of the financial statements as the
Parent Company’s primary purpose is to act as a holding company with investments in the Group’s subsidiaries, not to generate operating
profits and therefore a profit based measure is not relevant.
NatWest Group Annual Report and Accounts 2020
255
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Independent auditors’ report to the members of NatWest Group plc
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that
performance materiality was 50% (2019: 50%) of our planning materiality, namely £80 million (2019: £80 million). We have set performance
materiality at this percentage (which is at the lowest end of the range of our audit methodology) based on various considerations including the
past history of misstatements, the effectiveness of the control environment and other factors affecting the entity and its financial reporting.
Audit work at component teams for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based
on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of
the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of
performance materiality allocated to components was £30 million to £72 million (2019: £30 million to £80 million).
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £8 million (2019: £8 million),
which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative
grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the Annual Report and Accounts including the Strategic Report, Business Review,
Corporate Governance, Report of the Group Nominations and Governance Committee, Report of the Group Audit Committee, Report of the
Group Board Risk Committee, Report of the Group Sustainable Banking Committee, Report of the Technology and Innovation Committee,
Report of the Directors, Risk and capital Management, Non-IFRS financial measures, Risk Factors, Material Contracts, Shareholder
Information, and Forward Looking Statements, other than the financial statements and our auditor’s report thereon. The directors are
responsible for the other information contained within the annual report.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report,
we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such
material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the
financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of the other
information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act
2006.
In our opinion, based on the work undertaken in the course of the audit:
the information given in the Strategic report and the Report of the directors for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
the Strategic report and the Report of the directors have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit,
we have not identified material misstatements in the Strategic report or the Report of the directors.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our
opinion:
adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from
branches not visited by us; or
the Parent Company financial statements and the part of the Directors’ Remuneration report to be audited are not in agreement with the
accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Corporate Governance Statement
The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate
Governance Statement relating to the group and company’s compliance with the provisions of the UK Corporate Governance Code specified for
our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance
Statement is materially consistent with the financial statements or our knowledge obtained during the audit:
Directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties
identified;
Directors’ explanation as to its assessment of the company’s prospects, the period this assessment covers and why the period is
appropriate;
Directors’ statement on fair, balanced and understandable;
Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks;
The section of the annual report that describes the review of effectiveness of risk management and internal control systems; and;
The section describing the work of the audit committee.
NatWest Group Annual Report and Accounts 2020
256
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Independent auditors’ report to the members of NatWest Group plc
Responsibilities of directors
As explained more fully in the Statement of directors’ responsibilities, the directors are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group and Parent Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either
intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but
is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of these financial statements.
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities,
outlined below, to detect irregularities, including fraud. The risk of not detecting a material misstatement due to fraud is higher than the risk of
not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or
through collusion. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the company and
management.
We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most
significant are the regulations, licence conditions and supervisory requirements of the Prudential Regulation Authority (PRA) and the
Financial Conduct Authority (FCA); Companies Act 2006; and the Sarbanes Oxley Act (SOX).
We understood how the Group is complying with those frameworks by making inquiries of management, internal audit and those
responsible for legal and compliance matters. We also reviewed correspondence between the Group and regulatory bodies; reviewed
minutes of the Board and Risk Committees; and gained an understanding of the Group’s governance framework.
We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by considering
the controls established to address risks identified to prevent or detect fraud. We also identified the risks of fraud in our key audit matters as
described above and identified areas that we considered when performing our fraud procedures, such as cybersecurity, the impact of
remote working, implementation of new government supported lending products, and the appropriateness of sources used when performing
confirmation testing on accounts such as cash, loans and securities.
Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures
involved inquiries of legal counsel, executive management, and internal audit. We also tested controls and performed procedures to
respond to the fraud risks as identified in our key audit matters. These procedures were performed by both the primary team and component
teams with oversight from the primary team.
The Group operates in the banking industry which is a highly regulated environment. As such, the Senior Statutory Auditor considered the
experience and expertise of the engagement team to ensure that the team had the appropriate competence and capabilities, involving
specialists where appropriate.
A further description of our responsibilities for the audit of the financial statements is located on the
Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Other matters we are required to address
Following the recommendation from the Group Audit Committee, we were appointed by the Group at its annual general meeting on 4 May
2016 to audit the financial statements for the year ending 31 December 2016 and subsequent financial periods.
The period of total uninterrupted engagement including previous renewals and reappointments is 5 years, covering periods from our
appointment through 31 December 2020.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company and we remain
independent of the Group and the Parent Company in conducting the audit.
The audit opinion is consistent with the additional report to the Group Audit Committee.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Jonathan Bourne (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London, United Kingdom
19 February 2021
NatWest Group Annual Report and Accounts 2020
257
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Consolidated income statement for the year ended 31 December 2020
Interest receivable
Interest payable
Net interest income
Fees and commissions receivable
Fees and commissions payable
Income from trading activities
Other operating income
Non-interest income
Total income
Staff costs
Premises and equipment
Other administrative expenses
Depreciation and amortisation
Impairment of other intangible assets
Operating expenses
Profit before impairment losses
Impairment losses
Operating (loss)/profit before tax
Tax charge
(Loss)/profit for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Paid-in equity holders
Non-controlling interests
Earnings per ordinary share
Earnings per ordinary share - fully diluted
Note
1
2
3
14
7
8
8
2020
£m
10,071
(2,322)
7,749
2,734
(722)
1,125
(90)
3,047
10,796
(3,923)
(1,223)
(1,845)
(905)
(9)
(7,905)
2,891
(3,242)
(351)
(83)
(434)
(753)
26
355
(62)
(434)
(6.2p)
(6.2p)
2019
£m
11,375
(3,328)
8,047
3,359
(848)
932
2,763
6,206
14,253
(4,018)
(1,259)
(2,828)
(1,176)
(44)
(9,325)
4,928
(696)
4,232
(432)
3,800
3,133
39
367
261
3,800
26.0p
25.9p
2018
£m
11,049
(2,393)
8,656
3,218
(861)
1,507
882
4,746
13,402
(4,122)
(1,383)
(3,372)
(731)
(37)
(9,645)
3,757
(398)
3,359
(1,208)
2,151
1,622
182
355
(8)
2,151
13.5p
13.4p
The accompanying notes on pages 269 to 322, the accounting policies on pages 264 to 268 and the audited sections of the Business review
and Risk and capital management sections on pages 84 to 96 and 157 to 246 form an integral part of these financial statements.
NatWest Group Annual Report and Accounts 2020
258
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Consolidated statement of comprehensive income for the year ended 31 December 2020
(Loss)/profit for the year
Items that do not qualify for reclassification
Remeasurement of retirement benefit schemes
- contributions in preparation for ring-fencing (1)
- other movements
(Loss)/profit on fair value of credit in financial liabilities
designated at FVTPL due to own credit risk
FVOCI financial assets
Tax
Items that do qualify for reclassification
FVOCI financial assets
Cash flow hedges
Currency translation
Tax
Other comprehensive income/(loss) after tax
Total comprehensive (loss)/income for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Paid-in equity holders
Non-controlling interests
2020
£m
(434)
—
4
(52)
(64)
42
(70)
44
271
276
(89)
502
432
(2)
(338)
26
355
(45)
(2)
2019
£m
3,800
—
(142)
(189)
(71)
28
(374)
(14)
294
(1,836)
(170)
(1,726)
(2,100)
1,700
1,044
39
367
250
1,700
2018
£m
2,151
(2,053)
86
200
48
502
(1,217)
7
(581)
310
189
(75)
(1,292)
859
305
182
355
17
859
Note:
(1) On 17 April 2018 NatWest Group agreed a Memorandum of Understanding (MoU) with the Trustees of the NatWest Group Pension Fund in connection with
the requirements of ring-fencing. NWM Plc could not continue to be a participant in the Main section and separate arrangements were required for its
employees. Under the MoU, NWB Plc made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the
changes in covenant. Also under the MoU, NWM Plc made a £53 million contribution to the NWM section in Q1 2019.
The accompanying notes on pages 269 to 322, the accounting policies on pages 264 to 268 and the audited sections of the Business review
and Risk and capital management on pages 84 to 96 and 157 to 246 form an integral part of these financial statements.
NatWest Group Annual Report and Accounts 2020
259
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Consolidated balance sheet as at 31 December 2020
Assets
Cash and balances at central banks*
Trading assets
Derivatives
Settlement balances
Loans to banks - amortised cost*
Loans to customers - amortised cost
Securities subject to repurchase agreements
Other financial assets excluding securities subject to repurchase agreements
Other financial assets
Intangible assets
Other assets
Total assets
Liabilities
Bank deposits
Customer deposits
Settlement balances
Trading liabilities
Derivatives
Other financial liabilities
Subordinated liabilities
Notes in circulation
Other liabilities
Total liabilities
Ordinary shareholders' interests
Other owners' interests
Owners’ equity
Non-controlling interests
Total equity
Total liabilities and equity
Note
2020
£m
2019
£m
11
9
10
11
11
15
16
17
11
11
9
10
18
19
20
21
124,489
68,990
166,523
2,297
6,955
360,544
11,542
43,606
55,148
6,655
7,890
799,491
20,606
431,739
5,545
72,256
160,705
45,811
9,962
2,655
6,388
755,667
38,367
5,493
43,860
(36)
43,824
80,993
76,745
150,029
4,387
7,554
326,947
4,269
57,183
61,452
6,622
8,310
723,039
20,493
369,247
4,069
73,949
146,879
45,220
9,979
2,109
7,538
679,483
38,993
4,554
43,547
9
43,556
799,491
723,039
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policies Note 1.
The accompanying notes on pages 269 to 322, the accounting policies on pages 264 to 268 and the audited sections of the Business review
and Risk and capital management on pages 84 to 96 and 157 to 246 form an integral part of these financial statements.
The accounts were approved by the Board of directors on 19 February 2021 and signed on its behalf by:
Howard Davies
Chairman
Alison Rose-Slade
Group Chief Executive Officer
Katie Murray
Group Chief Financial Officer
NatWest Group plc
Registered No. SC45551
NatWest Group Annual Report and Accounts 2020
260
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Consolidated statement of changes in equity for the year ended 31 December 2020
Called-up share capital - at 1 January
Ordinary shares issued
At 31 December
Paid-in equity - at 1 January
Redeemed/reclassified (1)
Securities issued during the period (2)
At 31 December
Share premium account - at 1 January
Ordinary shares issued
At 31 December
2020
£m
12,094
35
12,129
4,058
(1,277)
2,218
4,999
1,094
17
1,111
2019
£m
12,049
45
12,094
4,058
—
—
4,058
1,027
67
1,094
2018
£m
11,965
84
12,049
4,058
—
—
4,058
887
140
1,027
Merger reserve - at 1 January and 31 December
10,881
10,881
10,881
138
—
76
152
(6)
360
35
321
(50)
(77)
229
1,343
297
(55)
6
17
1,608
13,946
—
—
(372)
(26)
(355)
—
2
—
(355)
(248)
—
—
4
22
(52)
8
(11)
4
12,567
343
—
(107)
(90)
(8)
138
(191)
573
(279)
(68)
35
3,278
(428)
83
(110)
(1,480)
1,343
14,312
—
(187)
3,539
(39)
(367)
(3,018)
—
—
—
112
—
—
(142)
24
(189)
20
(6)
(113)
13,946
255
34
97
(42)
(1)
343
227
(63)
(518)
163
(191)
2,970
195
(33)
23
123
3,278
17,130
(105)
—
2,159
(182)
(355)
(241)
—
(2,805)
—
6
—
(2,053)
86
539
200
(33)
(2)
(32)
14,312
FVOCI reserve - at 1 January
Implementation of IFRS 9 on 1 January 2018
Unrealised gains/(losses)
Realised losses/(gains) (3)
Tax
At 31 December
Cash flow hedging reserve - at 1 January
Amount recognised in equity
Amount transferred from equity to earnings
Tax
At 31 December
Foreign exchange reserve - at 1 January
Retranslation of net assets
Foreign currency (losses)/gains on hedges of net assets
Tax
Recycled to profit or loss on disposal of businesses (4)
At 31 December
Retained earnings - at 1 January
Implementation of IFRS 9 on 1 January 2018
Implementation of IFRS 16 on 1 January 2019 (5)
(Loss)/profit attributable to ordinary shareholders and other equity owners
Equity preference dividends paid
Paid-in equity dividends paid
Ordinary dividends paid
Unclaimed dividend
Redemption of equity preference shares (6)
Redemption/reclassification of paid-in equity (1)
Realised (losses)/gains in period on FVOCI equity shares
- gross
- tax
Remeasurement of the retirement benefit schemes
- contributions in preparation for ring-fencing (7)
- other movements
- tax
Changes in fair value of credit in financial liabilities designated at FVTPL
- gross
- tax
Shares issued under employee share schemes
Share-based payments
At 31 December
SOCIE
NatWest Group Annual Report and Accounts 2020
261
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Consolidated statement of changes in equity for the year ended 31 December 2020
Own shares held - at 1 January
Shares issued under employee share schemes
Own shares acquired
At 31 December
Owners’ equity at 31 December
Non-controlling interests - at 1 January
Currency translation adjustments and other movements
(Loss)/profit attributable to non-controlling interests
Dividends paid
Equity raised (8)
Equity withdrawn and disposals (9)
At 31 December
Total equity at 31 December
Attributable to:
Ordinary shareholders
Preference shareholders
Paid-in equity holders
Non-controlling interests
2020
£m
(42)
95
(77)
(24)
43,860
9
17
(62)
—
—
—
(36)
43,824
38,367
494
4,999
(36)
43,824
2019
£m
(21)
39
(60)
(42)
43,547
754
(11)
261
(5)
45
(1,035)
9
2018
£m
(43)
87
(65)
(21)
45,736
763
25
(8)
(5)
—
(21)
754
43,556
46,490
38,993
496
4,058
9
43,556
41,182
496
4,058
754
46,490
(4)
Notes:
Paid-in equity reclassified to liabilities as the result of a call of US$2 billion AT1 notes in June 2020, redeemed in August 2020.
(1)
(2)
AT1 capital notes totalling US$1.5 billion less fees issued in June 2020. In November 2020 AT1 capital notes totalling £1.0 billion less fees were issued.
(3) During the year NWM Plc sold its entire equity holding in Saudi British Bank (SABB) leading to a realised loss of £337 million after tax which was recognised
through other comprehensive income and reclassified to retained earnings. Also, following a conversion of Visa B and C preference shares to Visa Class A
shares a gain of £125 million has been realised. There has been a corresponding adjustment to the conversion ratio of the Visa B and C preference shares.
Includes £290 million recycled on completion of the Alawwal bank merger in June 2019 (with a further £48m shown in Tax), £1,102 million recycled on the
subsequent liquidation of RFS Holdings B.V. (with a further £65m shown in Tax), and £67m attributable to the capital repayment by UBI DAC in 2019. The
Alawwal bank merger resulted in the derecognition of the associate investment in Alawwal bank and recognition of a new investment in SABB held at FVOCI.
The recycling gains arising from the liquidation of RFS Holdings B.V. and capital repayment by UBI DAC, have been calculated using the step-by-step method
in IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’ and by reference to the absolute reduction in ownership interest respectively. Amount
recycled also includes £2,661 million related to historical hedge relationship taken to non interest income.
Years ended 31 December 2020 and 31 December 2019 prepared under IFRS 16 Leases. Year ended 31 December 2018 prepared under IAS 17 Leases.
(5)
(6) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed.
(7) On 17 April 2018 NatWest Group agreed a Memorandum of Understanding (MoU) with the Trustees of the NatWest Group Pension Fund in connection with
the requirements of ring-fencing. NWM Plc could not continue to be a participant in the Main section and separate arrangements were required for its
employees. Under the MoU, NWB Plc made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the
changes in covenant. Also under the MoU, NWM Plc made a £53 million contribution to the NWM section in Q1 2019.
(8) Capital injection from RFS Holdings B.V. consortium members.
(9) Distribution to RFS Holdings B.V. consortium members on completion of the Alawwal bank merger.
The accompanying notes on pages 269 to 322, the accounting policies on pages 264 to 268 and the audited sections of the Business review
and Risk and capital management on pages 84 to 96 and 157 to 246 form an integral part of these financial statements.
NatWest Group Annual Report and Accounts 2020
262
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Consolidated cash flow statement for the year ended 31 December 2020
Cash flows from operating activities
Operating (loss)/profit before tax
Adjustments for:
Impairment losses
Amortisation of discounts and premiums of other financial assets
Depreciation, amortisation and impairment of other assets
Change in fair value taken to profit or loss of other financial assets
Change in fair value taken to profit or loss on other financial liabilities and subordinated liabilities
Elimination of foreign exchange differences
Other non-cash items
Income receivable on other financial assets
(Profit)/loss on sale of other financial assets
Loss/(profit) on sale of subsidiaries and associates
Loss on sale of other assets and net assets/liabiltiies
Interest payable on MRELs and subordinated liabilities
Loss on sale of MRELs and subordinated liabilities
Charges and releases on provisions
Defined benefit pension schemes
Net cash flows from trading activities
Decrease/(increase) in trading assets
(Increase)/decrease in derivative assets
Decrease/(increase) in settlement balance assets
(Increase)/decrease in loans to banks
(Increase)/decrease in loans to customers
Decrease in other financial assets
Decrease in other assets
Increase/(decrease) in banks deposits
Increase/(decrease) in customer deposits
(Decrease)/increase in settlement balance liabilities
(Decrease)/increase in trading liabilities
Increase/(decrease) in derivative liabilities
(Decrease)/increase in other financial liabilities
Increase/(decrease) in notes in circulation
Decrease in other liabilities
Changes in operating assets and liabilities
Income taxes paid
Net cash flows from operating activities (1)
Cash flows from investing activities
Sale and maturity of other financial assets
Purchase of other financial assets
Income received on other financial assets
Net movement in business interests and intangible assets
Sale of property, plant and equipment
Purchase of property, plant and equipment
Net cash flows from investing activities
Cash flows from financing activities
Movement in MRELs
Movement in subordinated liabilities
Issue of ordinary shares
Own shares (acquired)/disposed
Dividends paid
Issue of other equity instruments
Redemption of other equity instruments
Net cash flows from financing activities
Effects of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Note
2020
£m
2019
£m
2018
£m
(351)
4,232
3,359
3,242
267
914
(1,474)
962
(2,497)
28
(518)
(96)
16
(16)
1,182
324
296
215
2,494
4,147
(16,173)
2,090
(554)
(33,748)
221
8
113
62,492
(1,652)
(1,693)
13,826
(1,085)
546
(1,723)
26,815
(214)
29,095
25,952
(18,825)
518
(70)
348
(376)
7,547
636
(2,381)
—
(2)
(381)
2,218
—
90
1,879
38,611
100,588
139,199
696
255
1,220
(280)
856
949
(258)
(854)
22
(2,224)
(58)
1,151
—
1,243
188
7,138
(659)
(16,680)
(1,459)
3,563
(22,642)
924
707
(2,804)
8,333
1,003
1,599
17,982
2,871
(43)
(2,634)
(9,939)
(278)
(3,079)
19,990
(21,345)
854
(84)
428
(559)
(716)
1,927
(1,064)
17
(21)
(3,429)
—
—
(2,570)
(1,983)
(8,348)
108,936
100,588
398
169
768
416
(302)
427
2,553
(534)
(34)
—
(50)
876
—
1,333
308
9,687
7,543
27,494
(411)
(1,923)
3,080
518
541
(7,099)
(1,064)
222
(9,630)
(25,609)
2,449
(34)
(12,046)
(15,969)
(466)
(6,748)
11,832
(19,516)
534
(481)
264
(619)
(7,986)
6,676
(2,824)
144
22
(803)
—
(2,826)
389
676
(13,669)
122,605
108,936
27
29
Note:
(1)
Includes interest received of £10,007 million (2019 - £11,245 million, 2018 - £10,927 million) and interest paid of £2,414 million (2019 - £3,318 million,
2018 - £2,511 million).
The accompanying notes on pages 269 to 322, the accounting policies on pages 264 to 268 and the audited sections of the Business review
and Risk and capital management on pages 84 to 96 and 157 to 246 form an integral part of these financial statements.
NatWest Group Annual Report and Accounts 2020
263
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Accounting policies
1. Presentation of accounts
The accounts, set out on pages 258 to 338,
including these accounting policies on pages
264 to 268, and the audited sections of the
Business review: Risk and capital
management on pages 157 to 245, are
prepared on a going concern basis (see the
Report of the directors, page 153) and in
accordance with International Accounting
Standards in conformity with the requirements
of the Companies Act 2006 and with
International Financial Reporting Standards
adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European
Union. The significant accounting policies and
related judgments are set out below.
NatWest Group plc is incorporated in the UK
and registered in Scotland. Its accounts are
presented in accordance with the Companies
Act 2006.
The accounts are presented in the functional
currency, pounds sterling.
With the exception of certain financial
instruments as described in Accounting
policies 12 and 20 and investment property,
the accounts are presented on a historical
cost basis.
Accounting policy changes effective 1
January 2020
Amendments to IFRS 3 Business
Combinations (IFRS 3) - Changes to the
definition of a business
The IASB amended IFRS 3 to provide
additional guidance on the definition of a
business. The amendment aims to help
entities when determining whether a
transaction should be accounted for as a
business combination or as an asset
acquisition. The amendments are in line with
current accounting policy and therefore did
not affect the accounts.
Definition of material – Amendments to
IAS 1 – Presentation of Financial
Statements (IAS 1) and IAS 8 -
Accounting Policies, Changes in
Accounting Estimates and Errors (IAS 8)
The IASB clarified the definition of ‘material’
and aligned the definition of material used in
the Conceptual Framework and in other IFRS
standards. The amendments clarify that
materiality will depend on the nature or
magnitude of information. Under the amended
definition of materiality, an entity will need to
assess whether the information, either
individually or in combination with other
information, is material in the context of the
accounts. A misstatement of information is
material if it could reasonably be expected to
influence decisions made by the primary
users. NatWest Group’s definition and
application of materiality is in line with the
definition in the amendments.
Interest Rate Benchmark Reform (IBOR
reform) Phase 1 amendments to IFRS 9
and IAS 39
The IASB issued 'Interest Rate Benchmark
Reform (Amendments to IFRS 9, IAS 39 and
IFRS 7)' as a first reaction to the potential
effects the IBOR reform could have on
financial reporting. The amendments focused
on hedge accounting and allow hedge
relationships affected by the IBOR reform to
be accounted for as continuing hedges.
Amendments are effective for annual
reporting periods beginning on or after 1
January 2020 with early application permitted.
NatWest Group early adopted these
amendments for the annual period ending on
31 December 2019.
Interest Rate Benchmark Reform (IBOR
reform) Phase 2 amendments to IFRS 9,
IAS 39, IFRS 7, IFRS 4 and IFRS 16
Phase 2 of the IASB’s IBOR project
(published in August 2020) addresses the
wider accounting issues arising from the IBOR
reform. The amendments are effective for
annual reporting periods beginning on or after
1 January 2021 with early application
permitted. As NatWest Group early adopted
these amendments for the annual period
ending on 31 December 2020, which have
been endorsed by the EU and UK in January
2021, NatWest Group has applied
International Accounting Standards, which
have been adopted for use within the UK.
NatWest Group’s IBOR transition program
remains on-track and key milestones have
been met. Conversion from rates subject to
reform to alternative risk-free rates (RFRs) is
expected to increase as RFR-based products
become more widely available and key
market-driven conversion events occur.
Accounting policy change - balances held
with central banks
The definitions of central banks and the
classification of amounts that are held in cash
and balances at central banks and loans to
banks - amortised cost have been refined.
Amounts not subject to mandatory or term
deposit restrictions that are held with central
banks are now classified as Cash and
balances with central banks, irrespective of
jurisdiction. Amounts that are subject to
mandatory restrictions or time deposit
restrictions of more than 24 hours are
classified as Loans to banks - amortised cost.
Previously, this also included amounts subject
to restrictions of less than 24 hours. This
change in accounting policy resulted in a £5.0
billion increase in Cash and balances at
central banks and a corresponding reduction
in Loans to banks - amortised cost at 31
December 2020, and a balance sheet
reclassification from Loans to banks -
amortised cost to Cash and balances at
central banks of £3.1 billion at 31 December
2019 (1 January 2019 - £2.5 billion). These
did not impact the consolidated cash flow
statement.
2. Basis of consolidation
The consolidated accounts incorporate the
financial statements of NatWest Group plc
and entities (including certain structured
entities) that give access to variable returns
and that are controlled by NatWest Group.
Control is assessed by reference to our ability
to enforce our will on the other entity, typically
through voting rights.
All intergroup balances, transactions, income
and expenses are eliminated on
consolidation. The consolidated accounts are
prepared under uniform accounting policies.
3. Revenue recognition
Interest income or expense relates to financial
instruments measured at amortised cost and
debt instruments classified as fair value
through OCI using the effective interest rate
method, the effective part of any related
accounting hedging instruments, and finance
lease income recognised at a constant
periodic rate of return before tax on the net
investment on the lease. Negative effective
interest accruing to financial assets is
presented in interest payable.
Other interest relating to financial instruments
measured at fair value is recognised as part of
the movement in fair value.
Fees in respect of services are recognised as
the right to consideration accrues through the
performance of each distinct service
obligation to the customer. The arrangements
are generally contractual and the cost of
providing the service is incurred as the service
is rendered. The price is usually fixed and
always determinable.
4. Assets held for sale
A non-current asset (or disposal group) is
classified as held for sale if NatWest Group
will recover its carrying amount principally
through a sale transaction rather than through
continuing use and is measured at the lower
of its carrying amount or fair value less cost to
sell.
5. Employee benefits
Short-term employee benefits, such as
salaries, paid absences, and other benefits
are accounted for on an accruals basis over
the period in which the employees provide the
related services. Employees may receive
variable compensation satisfied by cash, by
debt instruments issued by NatWest Group or
by NatWest Group plc shares. NatWest Group
operates a number of share-based
compensation schemes under which it awards
NatWest Group plc shares and share options
to its employees. Such awards are generally
subject to vesting conditions.
Variable compensation that is settled in cash
or debt instruments is charged to profit or loss
on a straight-line basis over the vesting
period, taking account of forfeiture and
clawback criteria.
Contributions to defined contribution pension
schemes are recognised in profit or loss as
employee service costs accrue.
For defined benefit pension schemes, the net
of the recognisable scheme assets and
obligations is reported in the balance sheet.
The defined benefit obligation is measured on
an actuarial basis. The charge to profit or loss
for pension costs (mainly the service cost and
the net interest on the net defined benefit
asset or liability) is recognised in operating
expenses.
NatWest Group Annual Report and Accounts 2020
264
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Accounting policies
Actuarial gains and losses (i.e. gains and/or
losses on re-measuring the net defined
benefit asset or liability) are recognised in
other comprehensive income in full in the
period in which they arise. The difference
between scheme assets and scheme
liabilities, the net defined benefit asset or
liability, is recognised in the balance sheet
subject to the asset celling test which requires
the net defined benefit surplus to be limited to
the present value of any economic benefits
available to NatWest Group in the form of
refunds from the plan or reduced contributions
to it.
6. Intangible assets and goodwill
Intangible assets acquired by NatWest Group
are stated at cost less accumulated
amortisation and impairment losses.
Amortisation is charged to profit or loss over
the assets' estimated useful economic lives
using methods that best reflect the pattern of
economic benefits and is included in
Depreciation and amortisation. These
estimated useful economic lives are:
Computer software
Other acquired intangibles
3 to 12 years
5 to 10 years
Expenditure on internally generated goodwill
and brands is written-off as incurred. Direct
costs relating to the development of internal-
use computer software are capitalised once
technical feasibility and economic viability
have been established. These costs include
payroll, the costs of materials and services,
and directly attributable overheads.
Capitalisation of costs ceases when the
software is capable of operating as intended.
During and after development, accumulated
costs are reviewed for impairment against the
benefits that the software is expected to
generate. Costs incurred prior to the
establishment of technical feasibility and
economic viability are expensed as incurred,
as are all training costs and general
overheads. The costs of licences to use
computer software that are expected to
generate economic benefits beyond one year
are also capitalised.
Goodwill on the acquisition of a subsidiary is
the excess of the fair value of the
consideration transferred, the fair value of any
existing interest in the subsidiary and the
amount of any non-controlling interest
measured either at fair value or at its share of
the subsidiary’s net assets over the net fair
value of the subsidiary’s identifiable assets,
liabilities and contingent liabilities.
Goodwill is measured at initial cost less any
subsequent impairment losses. The gain or
loss on the disposal of a subsidiary includes
the carrying value of any related goodwill.
7. Impairment of non-financial assets
At each balance sheet date, NatWest Group
assesses whether there is any indication that
its intangible assets, rights of use or property,
plant and equipment are impaired. If any such
indication exists, NatWest Group estimates
the recoverable amount of the asset and the
impairment loss, if any. Goodwill is tested for
impairment annually or more frequently if
events or changes in circumstances indicate
that it might be impaired.
The recoverable amount of an asset that does
not generate cash flows that are independent
from those of other assets or groups of
assets, is determined as part of the cash-
generating unit to which the asset belongs. A
cash-generating unit is the smallest
identifiable group of assets that generates
cash inflows that are largely independent of
the cash inflows from other assets or groups
of assets. For the purposes of impairment
testing, goodwill acquired in a business
combination is allocated to each of NatWest
Group’s cash-generating units or groups of
cash-generating units expected to benefit
from the combination. The recoverable
amount of an asset or cash-generating unit is
the higher of its fair value less cost to sell or
its value in use. Value in use is the present
value of future cash flows from the asset or
cash-generating unit discounted at a rate that
reflects market interest rates adjusted for risks
specific to the asset or cash-generating unit
that have not been taken into account in
estimating future cash flows.
An impairment loss is recognised if the
recoverable amount of an intangible or
tangible asset is less than its carrying value.
The carrying value of the asset is reduced by
the amount of the loss and a charge
recognised in profit or loss. A reversal of an
impairment loss on intangible assets
(excluding goodwill) or property, plant and
equipment can be recognised when an
increase in service potential arises provided
the increased carrying value is not greater
than it would have been had no impairment
loss been recognised. Impairment losses on
goodwill are not reversed.
8. Foreign currencies
Transactions in foreign currencies are
recorded in the functional currency at the
foreign exchange rate ruling at the date of the
transaction. Monetary assets and liabilities
denominated in foreign currencies are
translated into the relevant functional currency
at the foreign exchange rates ruling at the
balance sheet date. Foreign exchange
differences arising on the settlement of foreign
currency transactions and from the translation
of monetary assets and liabilities are reported
in income from trading activities except for
differences arising on cash flow hedges and
hedges of net investments in foreign
operations (see Accounting policy 20).
Non-monetary items denominated in foreign
currencies that are stated at fair value are
translated into the relevant functional currency
at the foreign exchange rates ruling at the
dates the values are determined. Translation
differences arising on non-monetary items
measured at fair value are recognised in profit
or loss except for differences arising on non-
monetary financial assets classified as fair
value through OCI, for example equity shares,
which are recognised in other comprehensive
income unless the asset is the hedged item in
a fair value hedge.
Assets and liabilities of foreign operations,
including goodwill and fair value adjustments
arising on acquisition, are translated into
sterling at foreign exchange rates ruling at the
balance sheet date. Income and expenses of
foreign operations are translated into sterling
at average exchange rates unless these do
not approximate to the foreign exchange rates
ruling at the dates of the transactions. Foreign
exchange differences arising on the
translation of a foreign operation are
recognised in other comprehensive income.
The amount accumulated in equity is
reclassified from equity to profit or loss on
disposal of a foreign operation.
9. Leases
As lessor
Finance lease contracts are those which
transfer substantially all the risks and rewards
of ownership of an asset to a customer. All
other contracts with customers to lease assets
are classified as operating leases.
Loans to customers include finance lease
receivables measured at the net investment in
the lease, comprising the minimum lease
payments and any unguaranteed residual
value discounted at the interest rate implicit in
the lease. Interest receivable includes finance
lease income recognised at a constant
periodic rate of return before tax on the net
investment. Unguaranteed residual values are
subject to regular review; if there is a
reduction in their value, income allocation is
revised and any reduction in respect of
amounts accrued is recognised immediately.
Rental income from operating leases is
recognised in other operating income on a
straight-line basis over the lease term unless
another systematic basis better represents the
time pattern of the asset’s use. Operating
lease assets are included within Property,
plant and equipment and depreciated over
their useful lives.
As lessee
On entering a new lease contract, NatWest
Group recognises a right of use asset and a
lease liability to pay future rentals. The liability
is measured at the present value of future
lease payments discounted at the applicable
incremental borrowing rate. The right of use
asset is depreciated over the shorter of the
term of the lease and the useful economic life,
subject to review for impairment.
Short term and low value leased assets are
expensed on a systematic basis.
10. Provisions and contingent liabilities
NatWest Group recognises a provision for a
present obligation resulting from a past event
when it is more likely than not that it will be
required to transfer economic benefits to
settle the obligation and the amount of the
obligation can be estimated reliably.
Provision is made for restructuring costs,
including the costs of redundancy, when
NatWest Group Annual Report and Accounts 2020
265
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Accounting policies
NatWest Group has a constructive obligation
to restructure. An obligation exists when
NatWest Group has a detailed formal plan for
the restructuring and has raised a valid
expectation in those affected by starting to
implement the plan or by announcing its main
features.
NatWest Group recognises any onerous cost
of the present obligation under a contract as a
provision. An onerous cost is the unavoidable
cost of meeting NatWest Group’s contractual
obligations that exceed the expected
economic benefits. When NatWest Group
vacates a leasehold property, the right of use
asset would be tested for impairment and a
provision may be recognised for the ancillary
contractual occupancy costs, such as rates.
Contingent liabilities are possible obligations
arising from past events, whose existence will
be confirmed only by uncertain future events,
or present obligations arising from past events
that are not recognised because either an
outflow of economic benefits is not probable
or the amount of the obligation cannot be
reliably measured. Contingent liabilities are
not recognised but information about them is
disclosed unless the possibility of any outflow
of economic benefits in settlement is remote.
11. Tax
Income tax expense or income, comprising
current tax and deferred tax, is recorded in the
income statement except income tax on items
recognised outside profit or loss which is
credited or charged to other comprehensive
income. The tax consequences of servicing
equity instruments are recognised in the
income statement.
Current tax is income tax payable or
recoverable in respect of the taxable profit or
loss for the year arising in profit or loss, other
comprehensive income or equity. Provision is
made for current tax at rates enacted, or
substantively enacted, at the balance sheet
date.
Deferred tax is the tax expected to be payable
or recoverable in respect of temporary
differences between the carrying amount of
an asset or liability for accounting purposes
and the carrying amount for tax purposes.
Deferred tax liabilities are generally
recognised for all taxable temporary
differences and deferred tax assets are
recognised to the extent their recovery is
probable.
Deferred tax is not recognised on temporary
differences that arise from initial recognition of
an asset or a liability in a transaction (other
than a business combination) that at the time
of the transaction affects neither accounting
nor taxable profit or loss. Deferred tax is
calculated using tax rates expected to apply in
the periods when the assets will be realised or
the liabilities settled, based on tax rates and
laws enacted, or substantively enacted, at the
balance sheet date.
Deferred tax assets and liabilities are offset
where NatWest Group has a legally
enforceable right to offset and where they
relate to income taxes levied by the same
taxation authority either on an individual
NatWest Group company or on NatWest
Group companies in the same tax group that
intend, in future periods, to settle current tax
liabilities and assets on a net basis or on a
gross basis simultaneously.
Accounting for taxes is judgmental and carries
a degree of uncertainty because tax law is
subject to interpretation, which might be
questioned by the relevant tax authority.
NatWest Group recognises the most likely
current and deferred tax liability or asset,
assessed for uncertainty using consistent
judgments and estimates. Current and
deferred tax assets are only recognised where
their recovery is deemed probable, and
current and deferred tax liabilities are
recognised at the amount that represents the
best estimate of the probable outcome having
regard to their acceptance by the tax
authorities.
12. Financial instruments
Financial instruments are classified either by
product, by business model or by reference to
the IFRS default classification.
Classification by product relies on specific
designation criteria which are applicable to
certain classes of financial assets or
circumstances where accounting mismatches
would otherwise arise. Classification by
business model reflects how NatWest Group
manages its financial assets to generate cash
flows. A business model assessment
determines if cash flows result from holding
financial assets to collect the contractual cash
flows, from selling those financial assets, or
both.
The product classifications apply to financial
assets that are either designated at fair value
through profit or loss (DFV), or to equity
investments designated as at fair value
through other comprehensive income
(FVOCI). Financial assets may also be
irrevocably designated at fair value through
profit or loss upon initial recognition if such
designation eliminates, or significantly
reduces, accounting mismatch. In all other
instances, fair value through profit or loss
(MFVTPL) is the default classification and
measurement category for financial assets.
Regular way purchases of financial assets
classified as amortised cost are recognised on
the settlement date; all other regular way
transactions in financial assets are recognised
on the trade date.
Business model assessment of assets is
made at portfolio level, being the level at
which they are managed to achieve a
predefined business objective. This is
expected to result in the most consistent
classification of assets because it aligns with
the stated objectives of the portfolio, its risk
management, manager’s remuneration and
the ability to monitor sales of assets from a
portfolio.
Financial assets which are managed under a
‘held to collect’ business model, and have
contractual cash flows that comprise solely
payments of principal and interest are
measured at amortised cost.
Other financial assets which are managed
under a business model of both ‘held to
collect and sell’ and have contractual cash
flows comprising solely of payments of
principal and interest are measured at fair
value through other comprehensive income
(‘FVOCI’).
The contractual terms of a facility; any
leverage features; prepayment and extension
terms; and triggers that might reset the
effective rate of interest; are considered in
determining whether cash flows comprise
solely payments of principal and interest.
All financial instruments are measured at fair
value on initial recognition.
All liabilities not subsequently measured at fair
value are measured at amortised cost.
13. Impairment: expected credit losses
(ECL)
At each balance sheet date each financial
asset or portfolio of loans measured at
amortised cost or at fair value through other
comprehensive income, issued financial
guarantee and loan commitment is assessed
for impairment and presented as impairments
in the income statement. Loss allowances are
forward-looking, based on 12 month ECL
where there has not been a significant
increase in credit risk rating, otherwise
allowances are based on lifetime expected
losses.
ECL are a probability-weighted estimate of
credit losses. The probability is determined by
the risk of default which is applied to the cash
flow estimates. In the absence of a change in
credit rating, allowances are recognised when
there is a reduction in the net present value of
expected cash flows. On a significant increase
in credit risk, allowances are recognised
without a change in the expected cash flows,
although typically expected cash flows do
change also; and ECL are adjusted from 12
month to lifetime expectations.
Judgement is exercised as follows:
Models – in certain low default portfolios,
Basel parameter estimates are also
applied for IFRS 9.
Non-modelled portfolios, mainly in Private
Banking, RBSI and Lombard, use a
standardised capital requirement under
Basel II. Under IFRS 9, they have bespoke
treatments for the identification of
significant increase in credit risk.
Benchmark PDs, EADs and LGDs are
reviewed annually for appropriateness.
The ECL calculation is based on expected
future cash flows, which is typically applied
at a portfolio level.
Multiple economic scenarios (MES) – the
central, or base, scenario is most critical to
the ECL calculation, independent of the
NatWest Group Annual Report and Accounts 2020
266
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Accounting policies
method used to generate a range of
alternative outcomes and their
probabilities.
Significant increase in credit risk - IFRS 9
requires that at each reporting date, an
entity shall assess whether the credit risk
on an account has increased significantly
since initial recognition. Part of this
assessment requires a comparison to be
made between the current lifetime PD (i.e.
the current probability of default over the
remaining lifetime) with the equivalent
lifetime PD as determined at the date of
initial recognition.
On restructuring a financial asset without
causing derecognition of the original asset,
the revised cash flows are used in re-
estimating the credit loss. Where restructuring
causes derecognition of the original financial
asset, the fair value of the replacement asset
is used as the closing cash flow of the original
asset.
Where, in the course of the orderly realisation
of a loan, it is exchanged for equity shares or
property, the exchange is accounted for as
the sale of the loan and the acquisition of
equity securities or investment property.
Where NatWest Group’s interest in equity
shares following the exchange is such that
NatWest Group controls an entity, that entity
is consolidated.
Impaired loans are written off and therefore
derecognised from the balance sheet when
NatWest Group concludes that there is no
longer any realistic prospect of recovery of
part, or all, of the loan. For loans that are
individually assessed for impairment, the
timing of the write-off is determined on a case
by case basis. Such loans are reviewed
regularly and write-off will be prompted by
bankruptcy, insolvency, renegotiation and
similar events.
The typical time frames from initial impairment
to write-off for NatWest Group’s collectively-
assessed portfolios are:
Retail mortgages: write-off usually occurs
within five years, or earlier, when an
account is closed, but can be longer
where the customer engages
constructively,
Credit cards: the irrecoverable amount is
typically written off after twelve arrears
cycles or at four years post default any
remaining amounts outstanding are written
off,
Overdrafts and other unsecured loans:
write-off occurs within six years,
Commercial loans: write-offs are
determined in the light of individual
circumstances; and Business loans are
generally written off within five years.
14. Financial guarantee contracts
Under a financial guarantee contract, NatWest
Group, in return for a fee, undertakes to meet
a customer’s obligations under the terms of a
debt instrument if the customer fails to do so.
A financial guarantee is recognised as a
liability; initially at fair value and, if not
designated as at fair value through profit or
loss, subsequently at the higher of its initial
value less cumulative amortisation and any
provision under the contract measured in
accordance with Accounting policy 13.
Amortisation is calculated to recognise fees
receivable in profit or loss over the period of
the guarantee.
15. Loan commitments
Provision is made for ECL on loan
commitments, other than those classified as
held-for-trading. Syndicated loan
commitments in excess of the level of lending
under the commitment approved for retention
by NatWest Group are classified as held-for-
trading and measured at fair value through
profit or loss.
16. Derecognition
A financial asset is derecognised when the
contractual right to receive cash flows from
the asset has expired or when it has been
transferred and the transfer qualifies for
derecognition. Conversely, an asset is not
derecognised by a contract under which
NatWest Group retains substantially all the
risks and rewards of ownership. If
substantially all the risks and rewards have
been neither retained nor transferred,
NatWest Group does not derecognise an
asset over which it has retained control but
limits its recognition to the extent of its
continuing involvement.
A financial liability is removed from the
balance sheet when the obligation is
discharged, or is cancelled, or expires.
17. Sale and repurchase transactions
Securities subject to a sale and repurchase
agreement under which substantially all the
risks and rewards of ownership are retained
by NatWest Group continue to be shown on
the balance sheet and the sale proceeds
recorded as a financial liability. Securities
acquired in a reverse sale and repurchase
transaction under which NatWest Group is not
exposed to substantially all the risks and
rewards of ownership are not recognised on
the balance sheet and the consideration paid
is recorded as a financial asset. Sale and
repurchase transactions that are not
accounted for at fair value through profit or
loss are measured at amortised cost. The
difference between the consideration paid or
received and the repurchase or resale price is
treated as interest and recognised in interest
income or interest expense over the life of the
transaction.
18. Netting
Financial assets and financial liabilities are
offset and the net amount presented in the
balance sheet when, and only when, NatWest
Group currently has a legally enforceable right
to set off the recognised amounts and it
intends either to settle on a net basis or to
realise the asset and settle the liability
simultaneously. NatWest Group is party to a
number of arrangements, including master
netting agreements, that give it the right to
offset financial assets and financial liabilities,
but where it does not intend to settle the
amounts net or simultaneously, the assets
and liabilities concerned are presented gross.
19. Capital instruments
NatWest Group classifies a financial
instrument that it issues as a liability if it is a
contractual obligation to deliver cash or
another financial asset, or to exchange
financial assets or financial liabilities on
potentially unfavourable terms and as equity if
it evidences a residual interest in the assets of
NatWest Group after the deduction of
liabilities. The components of a compound
financial instrument issued by NatWest Group
are classified and accounted for separately as
financial assets, financial liabilities or equity
as appropriate. Incremental costs and related
tax that are directly attributable to an equity
transaction are deducted from equity.
The consideration for any ordinary shares of
NatWest Group plc purchased by NatWest
Group (treasury shares) is deducted from
equity. On the cancellation of treasury shares
their nominal value is removed from equity
and any excess of consideration over nominal
value is treated in accordance with the capital
maintenance provisions of the Companies Act
2006.
On the sale or re-issue of treasury shares the
consideration received and related tax are
credited to equity, net of any directly
attributable incremental costs.
20. Derivatives and hedging
Derivative financial instruments are initially
recognised, and subsequently measured, at
fair value. NatWest Group’s approach to
determining the fair value of financial
instruments is set out in the Critical
accounting policies section and key sources
of estimation uncertainty entitled Fair value -
financial instruments; further details are given
in Notes 10 and 12 to the accounts.
A derivative embedded in a financial liability
contract is accounted for as a stand-alone
derivative if its economic characteristics are
not closely related to the economic
characteristics of the host contract; unless the
entire contract is measured at fair value with
changes in fair value recognised in profit or
loss.
Gains and losses arising from changes in the
fair value of derivatives that are not the
hedging instrument in a qualifying hedge are
recognised as they arise in profit or loss.
Gains and losses are recorded in Income from
trading activities except for gains and losses
on those derivatives that are managed
together with financial instruments designated
at fair value; these gains and losses are
included in Other operating income. NatWest
Group enters into three types of hedge
relationship: hedges of changes in the fair
value of a recognised asset or liability or
unrecognised firm commitment (fair value
hedges); hedges of the variability in cash
flows from a recognised asset or liability or a
highly probable forecast transaction (cash
flow hedges); and hedges of the net
NatWest Group Annual Report and Accounts 2020
267
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Accounting policies
investment in a foreign operation (net
investment hedges).
Hedge relationships are formally designated
and documented at inception in line with the
requirements of IAS 39 Financial instruments
– Recognition and measurement. The
documentation identifies the hedged item, the
hedging instrument and details of the risk that
is being hedged and the way in which
effectiveness will be assessed at inception
and during the period of the hedge. If the
hedge is not highly effective in offsetting
changes in fair values or cash flows
attributable to the hedged risk, consistent with
the documented risk management strategy,
hedge accounting is discontinued. Hedge
accounting is also discontinued if NatWest
Group revokes the designation of a hedge
relationship.
Fair value hedge - in a fair value hedge, the
gain or loss on the hedging instrument is
recognised in profit or loss. The gain or loss
on the hedged item attributable to the hedged
risk is recognised in profit or loss and, where
the hedged item is measured at amortised
cost, adjusts the carrying amount of the
hedged item. Hedge accounting is
discontinued if the hedge no longer meets the
criteria for hedge accounting; or if the hedging
instrument expires or is sold, terminated or
exercised; or if hedge designation is revoked.
If the hedged item is one for which the
effective interest rate method is used, any
cumulative adjustment is amortised to profit or
loss over the life of the hedged item using a
recalculated effective interest rate.
Cash flow hedge - in a cash flow hedge, the
effective portion of the gain or loss on the
hedging instrument is recognised in other
comprehensive income and the ineffective
portion in profit or loss. When the forecast
transaction results in the recognition of a
financial asset or financial liability, the
cumulative gain or loss is reclassified from
equity to profit or loss in the same periods in
which the hedged forecast cash flows affect
profit or loss. Otherwise the cumulative gain
or loss is removed from equity and recognised
in profit or loss at the same time as the
hedged transaction. Hedge accounting is
discontinued if the hedge no longer meets the
criteria for hedge accounting; if the hedging
instrument expires or is sold, terminated or
exercised; if the forecast transaction is no
longer expected to occur; or if hedge
designation is revoked. On the discontinuation
of hedge accounting (except where a forecast
transaction is no longer expected to occur),
the cumulative unrealised gain or loss is
reclassified from equity to profit or loss when
the hedged cash flows occur or, if the forecast
transaction results in the recognition of a
financial asset or financial liability, when the
hedged forecast cash flows affect profit or
loss. Where a forecast transaction is no
longer expected to occur, the cumulative
unrealised gain or loss is reclassified from
equity to profit or loss immediately.
Hedge of net investment in a foreign operation
- In the hedge of a net investment in a foreign
operation, the portion of foreign exchange
differences arising on the hedging instrument
determined to be an effective hedge is
recognised in other comprehensive income.
Any ineffective portion is recognised in profit
or loss. Non-derivative financial liabilities as
well as derivatives may be the hedging
instrument in a net investment hedge. On
disposal or partial disposal of a foreign
operation, the amount accumulated in equity
is reclassified from equity to profit or loss.
Measurement of goodwill, deferred tax and
expected credit losses are highly sensitive to
reasonably possible changes in those
anticipated conditions. Other reasonably
possible assumptions about the future include
a prolonged financial effect of the COVID-19
pandemic on the economy of the UK and
other countries. Changes in judgements and
assumptions could result in a material
adjustment to those estimates in the next
reporting periods. Consideration of this source
of estimation uncertainty has been set out in
the notes below (as applicable).
21. Associates and joint ventures
An associate is an entity over which NatWest
Group has significant influence. A joint
venture is one which it controls jointly with
other parties. Investments in associates and
interests in joint ventures are recognised
using the equity method. They are stated
initially at cost, including attributable goodwill,
and subsequently adjusted for post-
acquisition changes in NatWest Group’s share
of net assets.
22. Cash and cash equivalents
In the cash flow statement, cash and cash
equivalents comprises cash and deposits with
banks with an original maturity of less than
three months together with short-term highly
liquid investments that are readily convertible
to known amounts of cash and subject to
insignificant risk of change in value.
23. Shares in Group entities
NatWest Group plc’s investments in its
subsidiaries are stated at cost less any
impairment.
Critical accounting policies and key
sources of estimation uncertainty
The reported results of NatWest Group are
sensitive to the accounting policies,
assumptions and estimates that underlie the
preparation of its accounts. UK company law
and IFRS require the directors, in preparing
NatWest Group's accounts, to select suitable
accounting policies, apply them consistently
and make judgements and estimates that are
reasonable and prudent. In the absence of an
applicable standard or interpretation, IAS 8
‘Accounting Policies, Changes in Accounting
Estimates and Errors’, requires management
to develop and apply an accounting policy that
results in relevant and reliable information in
the light of the requirements and guidance in
IFRS dealing with similar and related issues
and the IASB's ’Conceptual Framework for
Financial Reporting’. The judgements and
assumptions involved in NatWest Group's
accounting policies that are considered by the
Board to be the most important to the
portrayal of its financial condition are
discussed below. The use of estimates,
assumptions or models that differ from those
adopted by NatWest Group would affect its
reported results. During 2020, estimation
uncertainty has been affected by the COVID-
19 pandemic. The COVID-19 pandemic has
continued to cause significant economic and
social disruption during 2020. Key financial
estimates are based on management's latest
five-year revenue and cost forecasts.
Critical accounting policy
Deferred tax
Fair value - financial instruments
Loan impairment provisions
Goodwill
Provisions for liabilities and charges
Note
7
12
14
16
20
Future accounting developments
International Financial Reporting
Standards
COVID-19 amendments on lease
modifications – Amendments to IFRS 16 –
Leases (IFRS 16)
The IASB published 'amendments to IFRS 16
covering COVID-19-Related Rent
Concessions’. These provide lessees with an
exemption from assessing whether a COVID-
19 related rent concession is a lease
modification. The amendment is effective for
annual reporting periods beginning on or after
1 June 2020. The effect of the amendment on
NatWest Group’s accounts is immaterial and
will be adopted from 1 January 2021.
Other new standards and amendments that
are effective for annual periods beginning
after 1 January 2022, with earlier application
permitted, are set out below.
Effective 1 January 2022
Onerous Contracts – Cost of Fulfilling a
Contract (Amendments to IAS 37).
Property, Plant and Equipment: Proceeds
before Intended Use (Amendments to IAS
16).
Reference to Conceptual Framework
(Amendments to IFRS 3).
Classification of Liabilities as Current or
Non-current (Amendments to IAS 1).
Fees in the “10 per cent” test for
Derecognition of Financial Liabilities
(Amendments to IFRS 9).
Effective 1 January 2023
IFRS 17 Insurance Contracts
(Amendments to IFRS 17 Insurance
Contracts).
NatWest Group is assessing the effect of
adopting these standards and amendments
on its financial statements but do not expect
the effect to be material.
NatWest Group Annual Report and Accounts 2020
268
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
1 Net interest income
Balances at central banks
Loans to banks - amortised cost
Loans to customers - amortised cost
Other financial assets
Interest receivable
Balances with banks
Customer deposits
Other financial liabilities
Subordinated liabilities
Internal funding of trading businesses
Interest payable
Net interest income
2020
£m
90
246
9,252
483
10,071
144
911
846
402
19
2,322
7,749
2019
£m
321
405
9,795
854
11,375
319
1,256
1,102
483
168
3,328
8,047
2018
£m
358
164
9,993
534
11,049
250
849
791
461
42
2,393
8,656
Interest income on financial instruments measured at amortised cost and debt instruments classified as FVOCI is measured using the effective
interest rate which allocates the interest income or interest expense over the expected life of the asset or liability at the rate that exactly
discounts all estimated future cash flows to equal the instrument's initial carrying amount. Calculation of the effective interest rate takes into
account fees payable or receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early
redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows.
Included in interest receivable is finance lease income which is recognised at a constant periodic rate of return before tax on the net investment.
2 Non-interest income
Net fees and commissions (1)
Income from trading activities
Foreign exchange
Interest rate
Credit
Changes in fair value of own debt and derivative liabilities attributable to own credit risk
- debt securities in issue
- derivative liabilities
Equities, commodities and other
Other operating income
Loss on redemption of own debt
Operating lease and other rental income
Changes in the fair value of financial assets and liabilities designated at fair value
through profit or loss (2)
Changes in fair value of other financial assets at fair value through profit or loss (3)
Hedge ineffectiveness
(Loss)/profit on disposal of amortised cost assets
Profit/(loss) on disposal of fair value through other comprehensive income assets
Profit on sale of property, plant and equipment
Share of (losses)/profits of associated entities
(Loss)/profit on disposal of subsidiaries and associates (4)
Other income (5, 6)
2020
£m
2,012
569
541
3
(24)
—
36
1,125
(324)
232
(54)
2
24
(18)
96
13
(30)
(16)
(15)
(90)
3,047
2019
£m
2,511
448
532
32
(60)
(20)
—
932
—
250
(17)
58
48
42
(22)
58
(14)
2,224
136
2,763
6,206
2018
£m
2,357
643
695
45
72
20
32
1,507
—
256
(26)
18
(65)
44
34
50
83
(72)
560
882
4,746
Notes:
(1) Refer to Note 4 for further analysis.
Including related derivatives.
(2)
(3)
Includes instruments that have failed SPPI testing under IFRS 9.
(4) 2019 includes a gain of £444 million (€523 million), a legacy liability release of £256 million and an FX recycling gain of £290 million on completion of the
Alawwal bank merger in June 2019; In 2019, £1,102 million of FX recycling gains arising on the liquidation of RFS Holdings BV and £67 million in relation to a
capital repayment by UBI DAC. The recycling gains and capital repayment have been calculated using the step-by-step method in IFRIC 16 and by reference to
the proportion of equity applied to the FX translation reserve.
Includes income from activities other than banking. 2018 includes insurance recoveries of £357 million.
(5)
(6) 2020 includes £58 million loss on acquisition of a £3.0 billion prime UK mortgages portfolio from Metro Bank plc.
NatWest Group Annual Report and Accounts 2020
269
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
3 Operating expenses
Salaries
Bonus awards
Temporary and contract costs
Social security costs
Pension costs
- defined benefit schemes (see Note 5)
- defined contribution schemes
Other
Staff costs
Premises and equipment (1)
UK bank levy (2)
Depreciation and amortisation (3)
Other administrative expenses (4)
Administrative expenses
Impairment of other intangible assets
2020
£m
2,533
232
258
320
342
215
127
238
3,923
1,223
167
905
1,678
3,973
9
7,905
2019
£m
2,513
299
401
300
303
188
115
202
4,018
1,259
134
1,176
2,694
5,263
44
9,325
2018
£m
2,560
225
442
307
401
307
94
187
4,122
1,383
179
731
3,193
5,486
37
9,645
Notes:
(1) 2020 includes cost of £144 million including accelerated depreciation of £71 million (2019 - £161 million including £40 million accelerated depreciation) in
relation to the planned reduction of the property portfolio (2020 – freehold £1 million; leasehold £143 million; 2019 - freehold £4million; leasehold £157 million).
(2) 2019 includes a rebate of £31 million relating to prior periods.
(3) 2020 includes a £107 million charge relating to the reduction in property portfolio, leasehold £86 million and freehold £21 million (2019 - £287 million charge,
leasehold £37 million and freehold £250 million).
Includes litigation and conduct costs, net of amounts recovered. Refer to Notes 20 and 26 for further details.
(4)
The average number of persons employed, rounded to the nearest hundred, during the year, excluding temporary staff, was 61,400 (2019 -
64,200; 2018 - 67,600). The average number of temporary employees during 2020 was 3,200 (2019 - 4,100; 2018 - 4,000). The number of
persons employed at 31 December, excluding temporary staff, by reportable segment, was as follows:
Retail Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
UK
USA
Europe
Rest of the World
Total
2020
17,200
2,600
9,700
2,200
1,500
2,100
24,600
59,900
42,500
300
3,800
13,300
59,900
2019
19,600
2,700
9,700
1,900
1,600
5,000
22,400
62,900
44,600
400
4,100
13,800
62,900
2018
21,300
2,900
9,800
1,900
1,600
4,500
23,400
65,400
46,600
500
4,100
14,200
65,400
During the year a number of roles transferred from Retail Banking and Commercial Banking into centralised functions. Comparatives have been
re-stated.
Share-based payments
As described in the Remuneration report, NatWest Group grants share-based awards to employees principally on the following bases:
Award plan
Sharesave
Deferred performance
awards
Long-term incentives (2)
Eligible employees
UK, Republic of Ireland,
Channel Islands, Gibraltar
and Isle of Man
All
Senior employees
Nature of award
Option to buy shares under
employee savings plan
Vesting conditions (1)
Continuing employment or leavers
in certain circumstances
Settlement
2021 to 2024
Awards of ordinary shares
Awards of ordinary shares
and conditional shares
Continuing employment or leavers
in certain circumstances
Continuing employment or leavers
in certain circumstances and/or
satisfaction of the pre-vest
assessment and underpins
2021 to 2027
2021 to 2027
Notes:
(1) All awards have vesting conditions and therefore some may not vest.
(2) Long-term incentives include the Executive Share Option Plan, the Long-Term Incentive Plan and the Employee Share Plan.
NatWest Group Annual Report and Accounts 2020
270
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
3 Operating expenses continued
The fair value of options granted in 2020 was determined using a pricing model that included: expected volatility of shares determined at the
grant date based on historical volatility over a period of up to five years; expected option lives that equal the vesting period; expected dividends
on equity shares; and risk-free interest rates determined from UK gilts with terms matching the expected lives of the options.
The strike price of options and the fair value on granting awards of fully paid shares is the average market price over the five trading days (three
trading days for Sharesave) preceding grant date.
Sharesave
At 1 January
Granted
Exercised
Cancelled
At 31 December
2020
2019
2018
Average
exercise price
£
2.01
1.12
1.83
2.20
1.64
Shares
under option
(million)
84
35
—
(23)
96
Average
exercise price
£
2.18
1.78
2.83
2.25
2.01
Shares
under option
(million)
75
25
(4)
(12)
84
Average
exercise price
£
2.38
1.89
2.44
2.46
2.18
Shares
under option
(million)
60
28
(4)
(9)
75
Options are exercisable within six months of vesting; 6.3 million options were exercisable at 31 December 2020 (2019 – 3.2 million; 2018 – 4.9
million). The weighted average share price at the date of exercise of options was £1.57 (2019 - £2.49; 2018 - £2.13). At 31 December 2020,
exercise prices ranged from £1.12 to £2.27 (2019 - £1.68 to £2.91; 2018 - £1.68 to £3.43) and the remaining average contractual life was 2.3
years (2019 - 2.7 years; 2018 – 2.9 years). The fair value of options granted in 2020 was £8 million (2019 - £11 million; 2018 - £21 million).
Deferred performance awards
2020
2019
2018
At 1 January
Granted
Forfeited
Vested
At 31 December
Value at
grant
£m
196
109
(5)
(131)
169
Shares
awarded
(million)
76
67
(2)
(64)
77
Value at
grant
£m
233
110
(10)
(137)
196
Shares
awarded
(million)
92
42
(4)
(54)
76
Value at
grant
£m
264
156
(21)
(166)
233
Shares
awarded
(million)
101
59
(8)
(60)
92
The awards granted in 2020 vest in equal tranches on their anniversaries, predominantly over three years.
Long-term incentives
At 1 January
Granted
Vested/exercised
Lapsed
At 31 December
Value at
grant
£m
63
14
(17)
(10)
50
2020
Shares
Options
awarded over shares
(million)
(million)
—
25
—
10
—
(7)
—
(4)
—
24
Value at
grant
£m
85
15
(12)
(25)
63
2019
Shares
Options
awarded over shares
(million)
(million)
2
32
—
6
—
(4)
(2)
(9)
—
25
Value at
grant
£m
102
12
(5)
(24)
85
2018
Shares
Options
awarded over shares
(million)
(million)
2
37
—
5
—
(2)
—
(8)
2
32
The market value of awards vested/exercised in 2020 was £13 million (2019 - £10 million; 2018 - £5 million). There are no vested options of
shares exercisable up to 2021 (2019 - nil; 2018 - 2 million).
Bonus awards
The following tables analyse NatWest Group's bonus awards for 2020.
Non-deferred cash awards (1)
Total non-deferred bonus awards
Deferred bond awards
Deferred share awards
Total deferred bonus awards
Total bonus awards (2)
Bonus awards as a % of operating profit before tax (3)
Proportion of bonus awards that are deferred
of which
- deferred bond awards
- deferred share awards
Change
%
(13)
(13)
(40)
(28)
(36)
(33)
2020
£m
35
35
111
60
171
206
(173%)
83%
65%
35%
2019
£m
40
40
184
83
267
307
7%
87%
69%
31%
NatWest Group Annual Report and Accounts 2020
271
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
3 Operating expenses continued
Reconciliation of bonus awards to income statement charge
Bonus awarded
Less: deferral of charge for amounts awarded for current year
Income statement charge for amounts awarded in current year
Add: current year charge for amounts deferred from prior years
Less: forfeiture of amounts deferred from prior years
Income statement charge for amounts deferred from prior years
Income statement charge for bonus awards (2)
Notes:
(1) Cash awards are limited to £2,000 for all employees.
(2) Excludes other performance related compensation.
(3) Operating profit before tax and bonus expense.
Year in which income statement charge is expected to be
taken for deferred bonus awards
Bonus awards deferred from 2018 and earlier
Bonus awards deferred from 2019
Less: forfeiture of amounts deferred from prior years
Bonus awards for 2020 deferred
2020
£m
206
(77)
129
114
(11)
103
232
2019
£m
307
(110)
197
127
(25)
102
299
2018
£m
335
(130)
205
86
(66)
20
225
Actual
Expected
2018
£m
86
—
(66)
—
20
2019
£m
127
—
(25)
—
102
2020
£m
30
84
(11)
—
103
2021
£m
13
12
—
58
83
2022
and beyond
£m
7
10
—
19
36
4 Segmental analysis
The directors manage NatWest Group primarily by class of business
and present the segmental analysis on that basis. This includes the
review of net interest income for each class of business. Interest
receivable and payable for all reportable segments is therefore
presented net. Segments charge market prices for services rendered
between each other; funding charges between segments are
determined by NatWest Group Treasury, having regard to commercial
demands. The segment performance measure is operating
profit/(loss).
Reportable operating segments: The reportable operating segments
are as follows:
Retail Banking serves individuals and mass affluent customers in the
UK and includes Ulster Bank customers in Northern Ireland.
Ulster Bank RoI serves individuals and businesses in the Republic of
Ireland (RoI).
Commercial Banking serves start-up, SME, commercial and corporate
customers in the UK.
Private Banking serves UK connected high net worth individuals and
their business interests.
RBS International (RBSI) serves retail, commercial, and corporate
customers in the Channel Islands, Isle of Man and Gibraltar, and
financial institution customers in those same locations in addition to
the UK and Luxembourg.
NatWest Markets (NWM) helps NatWest Group’s corporate and
institutional customers manage their financial risks safely and achieve
their short-term and long-term sustainable financial goals.
Central items & other includes corporate functions, such as NatWest
Group Treasury, finance, risk management, compliance, legal,
communications and human resources. Central functions manages
NatWest Group capital resources and NatWest Group-wide regulatory
projects and provides services to the reportable segments. Balances in
relation to legacy litigation issues and the international private banking
business are included in Central items in the relevant periods.
Allocation of central balance sheet items
NatWest Group allocates all central costs relating to Services and
Functions to the business using appropriate drivers; these are reported
as indirect costs in the segmental income statements. Assets and risk-
weighted assets held centrally, mainly relating to NatWest Group
Treasury, are allocated to the business using appropriate drivers.
2020
Net interest income
Net fees and commissions
Other non-interest income
Total income
Operating expenses
Depreciation and amortisation
Impairment losses
Operating profit/(loss)
Retail
Banking
£m
3,868
379
(66)
4,181
(2,540)
—
(792)
849
Ulster
Bank RoI
£m
395
89
26
510
(486)
—
(250)
(226)
Commercial
Banking
£m
2,740
1,110
108
3,958
(2,281)
(149)
(1,927)
(399)
Private
Banking
£m
489
257
17
763
(447)
(8)
(100)
208
RBSI
£m
371
94
32
497
(274)
(17)
(107)
99
NWM
£m
(57)
99
1,081
1,123
(1,294)
(16)
(40)
(227)
Central items
& other (1)
£m
(57)
(16)
(163)
(236)
322
(715)
(26)
(655)
Total
£m
7,749
2,012
1,035
10,796
(7,000)
(905)
(3,242)
(351)
NatWest Group Annual Report and Accounts 2020
272
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
4 Segmental analysis continued
2019
Net interest income
Net fees and commissions
Other non-interest income
Total income
Operating expenses
Depreciation and amortisation
Impairment losses
Operating profit/(loss)
2018
Net interest income
Net fees and commissions
Other non-interest income
Total income
Operating expenses
Depreciation and amortisation
Impairment losses
Operating profit/(loss)
Retail
Banking
£m
4,130
696
40
4,866
(3,618)
—
(393)
855
4,283
692
79
5,054
(2,867)
—
(339)
1,848
Ulster
Bank RoI
£m
400
109
58
567
(552)
—
34
49
Commercial
Banking
£m
2,842
1,312
164
4,318
(2,458)
(142)
(391)
1,327
444
91
75
610
(583)
—
(15)
12
2,855
1,283
464
4,602
(2,362)
(125)
(147)
1,968
Private
Banking
£m
521
226
30
777
(482)
(4)
6
297
518
228
29
775
(476)
(2)
6
303
RBSI
£m
478
106
26
610
(254)
(10)
(2)
344
466
101
27
594
(254)
(6)
2
336
NWM
£m
(188)
85
1,445
1,342
(1,406)
(12)
51
(25)
Central items
& other (1)
£m
(136)
(23)
1,932
1,773
621
(1,008)
(1)
1,385
112
(33)
1,363
1,442
(1,589)
(15)
92
(70)
(22)
(5)
352
325
(783)
(583)
3
(1,038)
Total
£m
8,047
2,511
3,695
14,253
(8,149)
(1,176)
(696)
4,232
8,656
2,357
2,389
13,402
(8,914)
(731)
(398)
3,359
Note:
(1) 2020 predominantly relates to interest receivable in Treasury; 2019 predominantly related to interest receivable in Treasury and strategic disposals in Functions
and 2018 predominately related to interest receivable in Treasury.
Total revenue (1)
Retail Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
2020
Inter
segment
£m
39
2
64
163
3
13
(284)
—
External
£m
5,386
568
3,734
702
505
1,984
961
13,840
Total
£m
5,425
570
3,798
865
508
1,997
677
13,840
External
£m
6,161
616
4,347
703
639
2,516
3,447
18,429
2019
Inter
segment
£m
62
6
139
241
19
558
(1,025)
—
Total
£m
6,223
622
4,486
944
658
3,074
2,422
18,429
External
£m
6,188
668
4,576
681
506
1,882
2,155
16,656
2018
Inter
segment
£m
63
—
89
195
148
916
(1,411)
—
Note:
(1) Total revenue comprises interest receivable, fees and commissions receivable, income from trading activities and other operating income.
Total income
Retail Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
2020
Inter
segment
£m
24
(6)
(107)
63
(3)
(272)
301
—
External
£m
4,157
516
4,065
700
500
1,395
(537)
10,796
Total
£m
4,181
510
3,958
763
497
1,123
(236)
10,796
External
£m
4,834
562
4,814
631
603
1,664
1,145
14,253
2019
Inter
segment
£m
32
5
(496)
146
7
(322)
628
—
Total
£m
4,866
567
4,318
777
610
1,342
1,773
14,253
External
£m
5,021
613
5,079
655
469
1,510
55
13,402
2018
Inter
segment
£m
33
(3)
(477)
120
125
(68)
270
—
Total
£m
6,251
668
4,665
876
654
2,798
744
16,656
Total
£m
5,054
610
4,602
775
594
1,442
325
13,402
NatWest Group Annual Report and Accounts 2020
273
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
4 Segmental analysis continued
Analysis of net fees and commissions
2020
Fees and commissions receivable
- Payment services
- Credit and debit card fees
- Lending and financing
- Brokerage
- Investment management, trustee and
fiduciary services (1)
- Underwriting fees
- Other
Total
Fees and commissions payable
Net fees and commissions
2019
Fees and commissions receivable
- Payment services
- Credit and debit card fees
- Lending and financing
- Brokerage
- Investment management, trustee and
fiduciary services
- Underwriting fees
- Other
Total
Fees and commissions payable
Net fees and commissions
2018
Fees and commissions receivable
- Payment services
- Credit and debit card fees
- Lending and financing
- Brokerage
- Investment management, trustee and
fiduciary services
- Underwriting fees
- Other
Total
Fees and commissions payable
Net fees and commissions
Retail
Banking
£m
Ulster
Bank RoI
£m
Commercial
Banking
£m
Private
Banking
£m
RBS
International
£m
NatWest
Markets
£m
264
299
42
54
3
—
1
663
(284)
379
292
427
356
55
44
—
2
1,176
(480)
696
227
402
408
62
49
13
2
1,163
(471)
692
57
21
16
1
2
—
—
97
(8)
89
61
28
16
8
3
—
5
121
(12)
109
34
22
31
6
4
—
1
98
(7)
91
507
129
505
—
1
—
82
1,224
(114)
1,110
659
154
510
—
3
—
90
1,416
(104)
1,312
556
175
537
—
—
17
60
1,345
(62)
1,283
28
9
7
6
225
—
26
301
(44)
257
33
12
3
5
186
—
27
266
(40)
226
33
13
3
5
191
—
16
261
(33)
228
18
2
34
1
38
—
3
96
(2)
94
27
2
36
—
41
—
2
108
(2)
106
25
—
33
—
42
—
2
102
(1)
101
18
—
86
93
2
183
4
386
(287)
99
24
—
85
96
1
170
69
445
(360)
85
3
—
91
85
—
144
67
390
(423)
(33)
Central
items
& other
£m
—
—
—
—
—
—
(33)
(33)
17
(16)
—
—
—
—
—
—
(173)
(173)
150
(23)
—
—
—
—
—
—
(141)
(141)
136
(5)
Total
£m
892
460
690
155
271
183
83
2,734
(722)
2,012
1,096
623
1,006
164
278
170
22
3,359
(848)
2,511
878
612
1,103
158
286
174
7
3,218
(861)
2,357
Note:
(1) Comparisons with prior periods are impacted by the transfer of the Private Client Advice business to Private Banking from 1 January 2020.
Retail Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
2020
2019
2018
Assets
£m
197,618
26,620
187,413
26,206
33,984
270,147
57,503
799,491
Liabilities
£m
178,617
22,993
174,251
32,457
31,989
254,098
61,262
755,667
Assets
£m
182,305
25,385
165,399
23,304
31,738
263,885
31,023
723,039
Liabilities
£m
153,999
21,012
140,863
28,610
30,330
246,907
57,762
679,483
Assets
£m
171,011
25,193
166,478
21,983
28,398
244,531
36,641
694,235
Liabilities
£m
148,792
21,189
139,804
28,554
27,663
227,399
54,344
647,745
NatWest Group Annual Report and Accounts 2020
274
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
4 Segmental analysis continued
Segmental analysis of goodwill
There was no movement in the goodwill held by segments for the period 1 January 2019 to 31 December 2020. The total carrying value was
£5,607 million, comprised of Retail Banking £2,692 million; Commercial Banking £2,606 million; Private Banking £9 million; and RBS
International £300 million.
Geographical segments
The geographical analysis in the tables below has been compiled on the basis of location of office where the transactions are recorded.
UK
£m
12,511
9,479
(2,163)
1,637
911
(117)
9,747
(193)
USA
£m
211
—
—
33
170
(22)
181
(85)
704,725
686,500
118,654
25,439
26,932
—
Europe
£m
944
570
(158)
245
33
45
735
(161)
66,884
41,018
10,068
1,148
417
(70)
211
49
436
1,043
421
RoW
£m
174
22
(1)
97
11
4
133
88
Total
£m
13,840
10,071
(2,322)
2,012
1,125
(90)
10,796
(351)
2,443
1,217
10
799,491
755,667
128,732
128
35
(3)
72
8
9
121
82
18,429
11,375
(3,328)
2,511
932
2,763
14,253
4,232
228
—
—
37
148
13
198
186
27,396
31,715
—
57,534
33,539
10,571
3,467
1,078
2
723,039
679,483
124,995
300
—
—
12
124
119
255
(718)
838
430
(26)
102
68
229
803
150
167
30
(1)
60
7
67
163
122
16,656
11,049
(2,393)
2,357
1,507
882
13,402
3,359
25,487
31,329
—
47,211
27,183
5,408
5,604
1,048
208
694,235
647,745
126,883
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
16,925
10,923
(3,255)
2,191
727
2,305
12,891
3,543
634,642
613,151
114,422
15,351
10,589
(2,366)
2,183
1,308
467
12,181
3,805
615,933
588,185
121,267
2020
Total revenue
Interest receivable
Interest payable
Net fees and commissions
Income from trading activities
Other operating income
Total income
Operating (loss)/profit before tax
Total assets
Total liabilities
Contingent liabilities and commitments
2019
Total revenue
Interest receivable
Interest payable
Net fees and commissions
Income from trading activities
Other operating income
Total income
Operating profit before tax
Total assets*
Total liabilities
Contingent liabilities and commitments
2018
Total revenue
Interest receivable
Interest payable
Net fees and commissions
Income from trading activities
Other operating income
Total income
Operating profit/(loss) before tax
Total assets
Total liabilities
Contingent liabilities and commitments
*2019 re-presented.
NatWest Group Annual Report and Accounts 2020
275
Notes to the consolidated financial statements
5 Pensions
Defined contribution schemes
NatWest Group sponsors a number of defined contribution pension
schemes in different territories, which new employees are offered the
opportunity to join.
Defined benefit schemes
NatWest Group sponsors a number of pension schemes in the UK and
overseas, including the Main section of the NatWest Group Pension
Fund (the “Main section”) which operates under UK trust law and is
managed and administered on behalf of its members in accordance
with the terms of the trust deed, the scheme rules and UK legislation.
Pension fund trustees are appointed to operate each fund and ensure
benefits are paid in accordance with the scheme rules and national
law. The trustees are the legal owner of a scheme’s assets, and have
a duty to act in the best interests of all scheme members.
The schemes generally provide a pension of one-sixtieth of final
pensionable salary for each year of service prior to retirement up to a
maximum of 40 years and are contributory for current members. These
have been closed to new entrants for over ten years, although current
members continue to build up additional pension benefits, currently
subject to 2% maximum annual salary inflation, while they remain
employed by NatWest Group.
The Main section corporate trustee is NatWest Pension Trustee
Limited (the Trustee), a wholly owned subsidiary of NWB Plc, Principal
Employer of the Main section. The Board of the Trustee comprises
four member trustee directors selected from eligible active staff,
deferred and pensioner members who apply and six appointed by
NatWest Group. Under UK legislation, a defined benefit pension
scheme is required to meet the statutory funding objective of having
sufficient and appropriate assets to cover its liabilities (the pensions
that have been promised to members).
Similar governance principles apply to NatWest Group’s other pension
schemes.
Investment strategy
The assets of the Main section, which is typical of other group
schemes, represent 90% of plan assets at 31 December 2020 (2019 -
90%) and are invested as shown below.
The Main section employs derivative instruments to achieve a desired
asset class exposure and to reduce the section’s interest rate, inflation
and currency risk. This means that the net funding position is
considerably less sensitive to changes in market conditions than the
value of the assets or liabilities in isolation.
Major classes of plan assets as a percentage of
total plan assets of the Main section
Equities
Index linked bonds
Government bonds
Corporate and other bonds
Real estate
Derivatives
Cash and other assets
Quoted
%
3.9
49.4
6.2
11.8
—
—
—
71.3
2020
Unquoted
%
4.6
—
—
5.0
4.2
10.0
4.9
28.7
Total
%
8.5
49.4
6.2
16.8
4.2
10.0
4.9
100.0
The Main section’s holdings of derivative instruments are summarised in the table below:
Inflation rate swaps
Interest rate swaps
Currency forwards
Equity and bond call options
Equity and bond put options
Other
Notional
amounts
£bn
18
68
11
1
3
2
2020
Fair value
Assets
£m
1,390
11,197
334
169
1
63
Liabilities
£m
1,716
6,215
38
1
19
17
Quoted
%
3.9
47.8
9.3
11.6
—
—
—
72.6
Notional
amounts
£bn
16
57
9
1
5
3
2019
Unquoted
%
4.8
—
—
5.0
4.8
7.8
5.0
27.4
Total
%
8.7
47.8
9.3
16.6
4.8
7.8
5.0
100.0
2019
Fair value
Assets
£m
909
6,407
215
122
3
124
Liabilities
£m
1,094
2,992
42
—
1
13
Swaps have been executed at prevailing market rates and within
standard market bid/offer spreads with a number of counterparty
banks, including NWB Plc.
The schemes do not invest directly in NatWest Group but can have
exposure to NatWest Group. The trustees of the respective UK
schemes are responsible for ensuring that indirect investments in
NatWest Group do not exceed the 5% regulatory limit.
At 31 December 2020, the gross notional value of the swaps was £88
billion (2019 - £75 billion) and had a net positive fair value of £4,706
million (2019 - £3,340 million) against which the banks had posted
approximately 104% collateral.
NatWest Group Annual Report and Accounts 2020
276
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
5 Pensions continued
Changes in value of net pension (asset)/liability
At 1 January 2019
Currency translation and other adjustments
Income statement
Statement of comprehensive income
Contributions by employer
Contributions by plan participants and other scheme members
Liabilities extinguished upon settlement
Benefits paid
At 1 January 2020
Currency translation and other adjustments
Income statement
Net interest expense
Current service cost
Past service cost
Statement of comprehensive income
Return on plan assets excluding recognised interest income
Experience gains and losses
Effect of changes in actuarial financial assumptions
Effect of changes in actuarial demographic assumptions
Asset ceiling adjustments
All schemes
Present
value
of defined
Main section
Present
value
of defined
Fair
value of
plan
Asset
Net
Fair
Asset
Net
value of
plan
assets obligation (1) funding (2)
£m
£m
8,340
35,466
—
—
1,156
242
4,825 (1,696)
ceiling/ pension
benefit minimum (asset)/
liability
£m
£m
— 48,752
(85)
—
1,374
153
3,556
108
473
— (261)
—
—
15
— (188)
—
— (1,972)
—
— 51,925
6,886
92
4
—
—
10
—
(1,788)
39,669
4
assets obligation (1) funding (2)
£m
£m
8,790
39,607
—
(76)
1,307
255
5,428 (1,730)
ceiling/ pension
benefit minimum (asset)/
liability
£m
(355)
9
188
142
— (473)
—
—
(6)
—
—
—
(495)
7,315
— (21)
—
15
(194)
(1,972)
44,115
71
£m
43,806
—
1,245
3,021
261
10
—
(1,788)
46,555
—
936
—
—
936
5,486
—
—
—
—
5,486
795
156
3
954
—
(427)
5,419
138
—
5,130
141
—
—
141
— 1,037
—
—
1,037
156
3
159
— (5,486)
— (427)
— 5,419
138
—
426
426
70
426
6,027
—
—
—
—
6,027
890
208
5
1,103
—
(455)
5,974
185
—
5,704
149
—
—
149
2
208
5
215
— (6,027)
— (455)
— 5,974
185
—
319
319
(4)
319
Contributions by employer
Contributions by plan participants and other scheme members
Liabilities extinguished upon settlement
Benefits paid
At 31 December 2020
233
9
—
(1,896)
51,323
—
9
—
(1,896)
43,870
296
— (233)
14
—
—
—
—
(2)
— (2,140)
—
— 57,249
7,453
—
14
(3)
(2,140)
48,864
— (296)
—
—
(1)
—
—
—
(602)
7,783
Notes:
(1) Defined benefit obligations are subject to annual valuation by independent actuaries.
(2) NatWest Group recognises the net pension scheme surplus or deficit as a net asset or liability. In doing so, the funded status is adjusted to reflect any schemes
with a surplus that NatWest Group may not be able to access, as well as any minimum funding requirement to pay in additional contributions. This is most
relevant to the Main section, where the surplus is not recognised. Other NatWest Group schemes that this applies to include the Ulster Bank Limited scheme
and the NatWest Markets section.
(3) NatWest Group expects to make contributions to the Main section of £215 million in 2021. Additional contributions of up to £500 million will be paid to the Main
section, should NatWest Group make distributions in 2021, in line with the ring-fencing agreement with the Trustee.
Amounts recognised on the balance sheet
Fund assets at fair value
Present value of fund liabilities
Funded status
Asset ceiling/minimum funding
Net pension asset/(liability) comprises
Net assets of schemes in surplus (included in Other assets, Note 17)
Net liabilities of schemes in deficit (included in Other liabilities, Note 20)
All schemes
2020
£m
57,249
48,864
8,385
7,783
602
2020
£m
723
(121)
602
2019
£m
51,925
44,115
7,810
7,315
495
2019
£m
614
(119)
495
NatWest Group Annual Report and Accounts 2020
277
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
5 Pensions continued
Funding and contributions by NatWest Group
In the UK, the trustees of defined benefit pension schemes are
required to perform funding valuations every three years. The trustees
and the sponsor, with the support of the Scheme Actuary, agree the
assumptions used to value the liabilities and a Schedule of
Contributions required to eliminate any funding deficit. The funding
assumptions incorporate a margin for prudence over and above the
expected cost of providing the benefits promised to members, taking
into account the sponsor’s covenant and the investment strategy of the
scheme. Similar arrangements apply in the other territories where the
NatWest Group sponsors defined benefit pension schemes. The last
funding valuation of the Main section was at 31 December 2017. The
next funding valuation, as at 31 December 2020, is to be agreed by 31
March 2022.
The triennial funding valuation of the Main section as at 31 December
2017 determined the funding level to be 96%, pension liabilities to be
£47 billion and the deficit to be £2 billion, which was eliminated by a £2
billion cash payment in October 2018. The average cost of the future
service of current members is 44% of salary before administrative
expenses and contributions from those members.
In 2018, the Group recognised an updated estimate of the impact of
guaranteed minimum pension equalisation (£102m) following the
clarity provided by the October 2018 Court ruling. Discussions around
implementing changes to benefits are well advanced, and the estimate
has been revised to £169m (2019: £141m) to reflect this.
Assumptions
Placing a value on NatWest Group’s defined benefit pension schemes’
liabilities requires NatWest Group’s management to make a number of
assumptions, with the support of independent actuaries. The ultimate
cost of the defined benefit obligations depends upon actual future
events and the assumptions made are unlikely to be exactly borne out
in practice, meaning the final cost may be higher or lower than
expected.
The most significant assumptions used for the Main section are shown below:
Principal IAS 19 actuarial assumptions
Discount rate
Inflation assumption (RPI)
Rate of increase in salaries
Rate of increase in deferred pensions
Rate of increase in pensions in payment
Lump sum conversion rate at retirement
Longevity at age 60:
Current pensioners
Males
Females
Future pensioners, currently aged 40
Males
Females
2020
%
1.4
2.9
1.8
3.0
2.7
20
years
27.1
29.0
28.3
30.4
2019
%
2.1
2.9
1.8
3.0
2.8
20
years
26.9
28.7
28.2
30.2
Principal assumptions of Main section
2017 triennial valuation
Fixed interest swap yield curve plus 0.8% per
annum
RPI swap yield curve
Modelled allowance for relevant caps and floors
18%
28.1
29.7
29.3
31.5
Discount rate
The IAS 19 valuation uses a single discount rate set by reference to
the yield on a basket of ‘high quality’ sterling corporate bonds. For the
triennial valuation discounting is by reference to a yield curve.
The weighted average duration of the Main section’s defined benefit
obligation at 31 December 2020 is 22 years (2019 – 21 years).
Significant judgement is required when setting the criteria for bonds to
be included in the basket of bonds that is used to determine the
discount rate used in the IAS 19 valuations. The criteria include issue
size, quality of pricing and the exclusion of outliers. Judgement is also
required in determining the shape of the yield curve at long durations;
a constant credit spread relative to gilts is assumed. Sensitivity to the
main assumptions is presented below.
NatWest Group Annual Report and Accounts 2020
278
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
5 Pensions continued
The chart below shows the projected benefit payment pattern for the Main section in nominal terms. These cashflows are based on the most
recent formal actuarial valuation, effective 31 December 2017.
)
m
£
(
s
w
o
l
f
h
s
a
C
d
e
t
c
e
p
x
E
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
0
5
10
15
20
25
30
35
40
55
50
45
Term (years)
60
65
70
75
80
85
90
95
100
The larger outflow in the first four years represents the expected level of transfers out to 31 December 2021.
The table below shows how the net pension asset of the Main section would change if the key assumptions used were changed independently.
In practice the variables have a degree of correlation and do not move completely in isolation.
2020
0.25% increase in interest rates/discount rate
0.25% increase in inflation
0.25% increase in credit spreads
Longevity increase of one year
0.25% additional rate of increase in pensions in payment
Increase in equity values of 10% (1)
2019
0.25% increase in interest rates/discount rate
0.25% increase in inflation
0.25% increase in credit spreads
Longevity increase of one year
0.25% additional rate of increase in pensions in payment
Increase in equity values of 10% (1)
Note:
(1)
Includes both quoted and private equity.
(Decrease)/increase
in value of
assets
£m
(2,585)
2,204
(6)
—
—
454
(2,330)
1,923
(5)
—
—
430
(Decrease)/
increase
in value of
liabilities
£m
(2,384)
1,603
(2,384)
1,930
1,608
—
(1,973)
1,394
(1,973)
1,706
1,326
—
Increase in
net pension
(obligations)/
assets
£m
(201)
601
2,378
(1,930)
(1,608)
454
(357)
529
1,968
(1,706)
(1,326)
430
The funded status is most sensitive to movements in credit spreads and longevity. The table below shows the combined change in the funded
status of the Main section as a result of larger movements in these assumptions, assuming no changes in other assumptions.
2020
Change in credit spreads
2019
Change in credit spreads
+50 bps
No change
-50 bps
+50 bps
No change
-50 bps
-2 years
£bn
7.8
3.9
(0.6)
6.9
3.6
(0.2)
Change in life expectancies
-1 years
£bn
6.1
1.9
(2.8)
5.4
1.7
(2.3)
No change
£bn
4.5
—
(5.1)
3.9
—
(4.4)
+ 1 year
£bn
2.9
(1.9)
(7.4)
2.3
(1.7)
(6.5)
+ 2 years
£bn
1.3
(3.9)
(9.7)
0.8
(3.6)
(8.7)
NatWest Group Annual Report and Accounts 2020
279
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
5 Pensions continued
The defined benefit obligation of the Main section is attributable to the different classes of scheme members in the following proportions:
Membership category
Active members
Deferred members
Pensioners and dependants
The experience history of NatWest Group schemes is shown below:
2020
%
14.2
50.9
34.9
100.0
2019
%
13.6
49.7
36.7
100.0
History of defined benefit schemes
Fair value of plan assets
Present value of plan obligations
Net surplus
Main section
2018
£m
2020
£m
2019
£m
2016
£m
51,323 46,555 43,806 44,652 43,824
43,870 39,669 35,466 37,937 38,851
4,973
8,340
2017
£m
6,715
7,453
6,886
All schemes
2018
£m
2020
£m
2019
£m
2016
£m
57,249 51,925 48,752 49,746 49,229
48,864 44,115 39,607 42,378 43,990
5,239
9,145
2017
£m
7,368
7,810
8,385
Experience gains/(losses) on plan liabilities
Experience gains/(losses) on plan assets
Actual return on plan assets
Actual return on plan assets
427
5,486
6,422
13.8%
275
(122)
3,021 (1,891)
4,266
(768)
9.7% (1.7%)
(107)
1,580
2,735
658
8,562
9,872
(81)
455
3,556 (2,090)
6,027
(848)
4,930
7,064
6.2% 32.2% 13.6% 10.1% (1.7%)
279
(93)
794
9,254
1,728
3,013 10,708
6.1% 30.9%
6 Auditor’s remuneration
Amounts payable to NatWest Group's auditors for statutory audit and other services are set out below. All audit-related and other services are
approved by the Group Audit Committee and are subject to strict controls to ensure the external auditor’s independence is unaffected by the
provision of other services. The Group Audit Committee recognises that for certain assignments, the auditors are best placed to perform the
work economically; for other work, NatWest Group selects the supplier best placed to meet its requirements. NatWest Group’s auditors are
permitted to tender for such work in competition with other firms where the work is permissible under audit independence rules.
Fees payable for:
- the audit of NatWest Group’s annual accounts (1)
- the audit of NatWest Group plc’s subsidiaries (1)
- audit-related assurance services (1,2)
Total audit and audit-related assurance services fees
Other assurance services
Corporate finance services (3)
Total other services
2020
£m
4.7
30.6
4.7
40.0
0.6
0.4
1.0
2019
£m
3.8
25.7
3.2
32.7
1.2
0.6
1.8
2018
£m
3.5
27.5
2.9
33.9
1.3
0.2
1.5
Notes:
(1) The 2020 audit fee was approved by the Group Audit Committee. At 31 December 2020, £23 million has been billed and paid in respect of the 2020 NatWest
Group audit fees.
(2) Comprises fees of £1.1 million (2019 - £1.1 million) in relation to reviews of interim financial information, £3.2 million (2019 - £1.4 million) in respect of reports to
NatWest Group’s regulators in the UK and overseas, and £0.4 million (2019 - £0.7 million) in relation to non-statutory audit opinions.
(3) Comprises fees of £0.4 million (2019 - £0.6 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances
undertaken by NatWest Group.
NatWest Group Annual Report and Accounts 2020
280
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
7 Tax
Current tax
Charge for the year
Over provision in respect of prior years
Deferred tax
Credit/(charge) for the year
(Decrease)/increase in the carrying value of deferred tax assets in respect of UK and Ireland
losses
(Under)/over provision in respect of prior years
Tax charge for the year
2020
£m
(191)
86
(105)
251
(139)
(90)
(83)
2019
£m
(673)
122
(551)
38
62
19
(432)
2018
£m
(1,025)
125
(900)
(280)
7
(35)
(1,208)
The actual tax charge differs from the expected tax charge, computed by applying the standard rate of UK corporation tax of 19% (2019 and
2018 – 19%), as follows:
Expected tax credt/(charge)
Losses and temporary differences in year where no deferred tax asset recognised
Foreign profits taxed at other rates
Items not allowed for tax:
- losses on disposals and write-downs
- UK bank levy
- regulatory and legal actions
- other disallowable items
Non-taxable items:
- Alawwal bank merger gain disposal
- FX recycling on the liquidation of RFS Holdings
- other non-taxable items
Taxable foreign exchange movements
Losses brought forward and utilised
Increase/(decrease) in the carrying value of deferred tax assets in respect of:
- UK losses
- Ireland losses
Banking surcharge
Tax on paid-in equity
UK tax rate change impact (1)
Adjustments in respect of prior years (2)
Actual tax charge
2020
£m
67
(27)
(20)
(22)
(32)
14
(70)
—
—
28
(3)
16
7
(146)
(27)
61
75
(4)
(83)
2019
£m
(804)
(4)
23
(71)
(26)
(165)
(62)
215
279
80
(1)
27
129
(67)
(199)
73
—
141
(432)
2018
£m
(638)
(55)
(8)
(44)
(38)
(203)
(63)
—
—
47
(27)
14
7
—
(357)
67
—
90
(1,208)
Notes:
(1) The Finance Bill 2020 amended the rate of UK corporation tax to 19% for the financial year beginning 1 April 2020. This reverses the rate reduction to 17% for
the financial year beginning 1 April 2020 previously enacted. Deferred tax balances previously based on the lower rate have been restated accordingly.
(2) Prior year tax adjustments incorporate refinements to tax computations made on submission and agreement with the tax authorities. Current taxation balances
include provisions in respect of uncertain tax positions, in particular in relation to restructuring and other costs where the taxation treatment remains subject to
agreement with the relevant tax authorities.
Judgment: tax contingencies
NatWest Group’s income tax charge and its provisions for income taxes necessarily involve a degree of estimation and judgement. The tax
treatment of some transactions is uncertain and tax computations are yet to be agreed with the tax authorities in a number of jurisdictions.
NatWest Group recognises anticipated tax liabilities based on all available evidence and, where appropriate, in the light of external advice. Any
difference between the final outcome and the amounts provided will affect current and deferred income tax charges in the period when the
matter is resolved.
Deferred tax
Deferred tax asset
Deferred tax liability
Net deferred tax asset
2020
£m
(901)
291
(610)
2019
£m
(1,011)
266
(745)
NatWest Group Annual Report and Accounts 2020
281
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
7 Tax continued
At 1 January 2019
Implementation of IFRS16 on 1 January 2019
Acquisitions and disposals of subsidiaries
Charge/(credit) to income statement
Charge/(credit) to other comprehensive income
Currency translation and other adjustments
At 1 January 2020
Charge/(credit) to income statement
Charge/(credit) to other comprehensive income
Currency translation and other adjustments
At 31 December 2020
Accelerated
capital
allowances
£m
220
—
(1)
(43)
—
(4)
172
(234)
—
(2)
(64)
Pension
£m
(528)
—
(1)
28
362
—
(139)
15
119
1
(4)
Expense
provisions
£m
(159)
—
—
41
—
—
(118)
33
—
—
(85)
Financial
instruments
£m
349
—
18
(81)
30
(1)
315
114
51
—
480
Tax
losses
carried
forward
£m
(936)
—
—
(28)
—
13
(951)
55
—
(9)
(905)
Other
£m
96
(60)
—
(36)
(20)
(4)
(24)
(5)
(7)
4
(32)
Total
£m
(958)
(60)
16
(119)
372
4
(745)
(22)
163
(6)
(610)
Deferred tax assets in respect of carried forward tax losses are recognised if the losses can be used to offset probable future taxable profits
after taking into account the expected reversal of other temporary differences. Recognised deferred tax assets in respect of tax losses are
analysed further below.
2020
£m
62
592
200
8
862
43
905
2019
£m
75
530
150
15
770
181
951
NWM Plc – NWM Plc expects that the balance of recognised deferred
tax asset at 31 December 2020 of £62 million (2019 - £75 million) in
respect of tax losses amounting to approximately £325 million will be
recovered by the end of 2027. The movement in the current financial
year reflects a £22 million decrease in the carrying value of the
deferred tax asset, offset by a £9m increase due to the UK tax rate
change impact.
NWB Plc – A deferred tax asset of £592 million has been recognised
in respect of total losses of £3,117 million. The losses arose principally
as a result of significant impairment and conduct charges between
2009 and 2012 during challenging economic conditions in the UK
banking sector. NWB Plc returned to tax profitability during 2015 and
expects the deferred tax asset to be utilised against future taxable
profits by the end of 2026.
RBS plc – A deferred tax asset of £200 million has been recognised in
respect of losses of £1,053 million of total losses of £4,242 million
carried forward at 31 December 2020. The losses were transferred
from NatWest Markets Plc as a consequence of the ring fencing
regulations. RBS plc expects the deferred tax asset to be utilised
against future taxable profits by the end of 2026.
UK tax losses carried forward
- NWM Plc
- NWB Plc
- RBS plc
- Ulster Bank Limited
Total
Overseas tax losses carried forward
UBI DAC
Critical accounting policy: Deferred Tax
NatWest Group has recognised a deferred tax asset of £901 million
(31 December 2019 - £1,011 million) that principally comprises losses
that arose in the UK, temporary differences, and a deferred tax liability
of £291 million (31 December 2019 - £266 million). This includes
amounts recognised in respect of UK trading losses of £862 million (31
December 2019 - £770 million). Deferred tax assets are recognised to
the extent that it is probable that there will be future taxable profits to
recover them.
Judgment - NatWest Group has considered the carrying value of
deferred tax assets and concluded that, based on management’s
estimates, sufficient taxable profits will be generated in future years to
recover recognised deferred tax assets.
Estimate - These estimates are partly based on forecast performance
beyond the horizon for management’s detailed plans. They have
regard to inherent uncertainties, such as Brexit, climate change, and
the impact of COVID. The deferred tax asset in NWM Group is
supported by way of future reversing temporary timing differences on
which deferred tax liabilities are recognised at 31 December 2020.
UK tax losses - Under UK tax rules, tax losses can be carried forward
indefinitely. As the recognised tax losses in NatWest Group arose prior
to 1 April 2015, credit in future periods is given against 25% of profits
at the main rate of UK corporation tax, excluding the Banking
Surcharge 8% rate introduced by The Finance (No. 2) Act 2015.
Deferred tax assets and liabilities at 31 December 2020 take into
account the reduced rates in respect of tax losses and temporary
differences and where appropriate, the banking surcharge inclusive
rate in respect of other banking temporary differences.
NatWest Group Annual Report and Accounts 2020
282
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
7 Tax continued
Overseas tax losses
UBI DAC – The Bank carried forward losses of £9,071 million at 31
December 2020. The losses arose principally as a result of significant
impairment charges between 2008 and 2013 during challenging
economic conditions in the Republic of Ireland. A deferred tax asset of
£43 million has been recognised at 31 December 2020 in respect of
£342 million of those total losses. The movement in the current
financial year reflects a £146 million reduction in the carrying value of
the deferred tax asset based on a revised economic outlook, and £:€
exchange differences. UBIDAC expects the deferred tax asset to be
utilised against future taxable profits by the end of 2029.
NatWest Market N.V. (NWM N.V.) – NWM N.V. Group management
did not recognise a deferred tax asset in respect of losses carried
forward at 31 December 2020 due to the implications from the wider
strategic review of the NWM franchise, and the uncertainty around the
consequences of Brexit on the volume and pace of transfers of
business from NWM Plc and NWB Plc to NWM N.V..
Unrecognised deferred tax
Deferred tax assets of £4,965 million (2019 - £4,653 million; 2018 -
£5,118, million) have not been recognised in respect of tax losses and
other temporary differences carried forward of £25,091 million (2019 -
£23,555 million; 2018 - £25,597 million) in jurisdictions where doubt
exists over the availability of future taxable profits. Of these losses and
other temporary differences, £714 million expire within five years and
£4,496 million thereafter. The balance of tax losses and other
temporary differences carried forward has no expiry date.
Deferred tax liabilities of £242 million (2019 - £262 million; 2018 - £257
million) have not been recognised in respect of retained earnings of
overseas subsidiaries and held-over gains on the incorporation of
certain overseas branches. Retained earnings of overseas
subsidiaries are expected to be reinvested indefinitely or remitted to
the UK free from further taxation. No taxation is expected to arise in
the foreseeable future in respect of held-over gains on which deferred
tax is not recognised. Changes to UK tax legislation largely exempts
from UK tax, overseas dividends received on or after 1 July 2009.
8 Earnings per share
Earnings
(Loss)/Profit attributable to ordinary shareholders
Weighted average number of shares (millions)
Weighted average number of ordinary shares outstanding during the year
Effect of dilutive share options and convertible securities
Diluted weighted average number of ordinary shares outstanding during the year
2020
£m
2019
£m
2018
£m
(753)
3,133
1,622
12,095
23
12,118
12,067
35
12,102
12,009
52
12,061
9 Trading assets and liabilities
Trading assets and liabilities comprise assets and liabilities held at fair value in trading portfolios.
2020
£m
19,404
18,760
1,611
39,775
4,184
5,149
16,436
3,446
29,215
68,990
19,036
23,229
1,804
44,069
1,408
26,779
72,256
2019
£m
24,095
20,579
1,947
46,621
4,897
5,458
14,902
4,867
30,124
76,745
27,885
21,509
1,606
51,000
1,762
21,187
73,949
Assets
Loans
Reverse repos
Collateral given
Other loans
Total loans
Securities
Central and local government
- UK
- US
- Other
Financial institutions and Corporate
Total securities
Total
Liabilities
Deposits
Repos
Collateral received
Other deposits
Total deposits
Debt securities in issue
Short positions
Total
NatWest Group Annual Report and Accounts 2020
283
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
10 Derivatives
Companies within NatWest Group transact derivatives as principal either as a trading activity or to manage balance sheet foreign exchange,
interest rate and credit risk.
Exchange rate contracts
Interest rate contracts
Credit derivatives
Equity and commodity contracts
Notional
£bn
3,328
10,703
15
1
2020
Assets
£m
52,239
114,115
161
8
166,523
Liabilities
£m
55,107
105,214
376
8
160,705
Notional
£bn
3,750
11,293
17
3
2019
Assets
£m
44,792
104,957
280
—
150,029
Liabilities
£m
47,141
99,331
359
48
146,879
NatWest Group applies hedge accounting to manage the following
risks: interest rate, foreign exchange and net investment in foreign
operations.
NatWest Group’s interest rate hedging relate to the management of
NatWest Group’s non-trading structural interest rate risk, caused by
the mismatch between fixed interest rates and floating interest rates.
NatWest Group manages this risk within approved limits. Residual risk
positions are hedged with derivatives, principally interest rate swaps.
Suitable larger financial instruments are fair value hedged; the
remaining exposure, where possible, is hedged by derivatives
documented as cash flow hedges.
Cash flow hedges of interest rate risk relates to exposures to the
variability in future interest payments and receipts due to the
movement of benchmark interest rates on forecast transactions and on
recognised financial assets and financial liabilities. This variability in
cash flows is hedged by interest rate swaps, fixing the hedged cash
flows. For these cash flow hedge relationships, the hedged items are
actual and forecast variable interest rate cash flows arising from
financial assets and financial liabilities with interest rates linked to the
relevant benchmark rate LIBOR, EURIBOR, SONIA, the Bank of
England Official Bank Rate or the European Central Bank Refinance
Rate. The variability in cash flows due to movements in the relevant
benchmark rate is hedged; this risk component is identified using the
risk management systems of NatWest Group. This risk component
comprises the majority of cash flow variability risk.
Fair value hedges of interest rate risk involve interest rate swaps
transforming the fixed interest rate risk in recognised financial assets
and financial liabilities to floating. The hedged risk is the risk of
changes in the hedged item’s fair value attributable to changes in the
benchmark interest rate embedded in the hedged item. The significant
embedded benchmarks are LIBOR, EURIBOR and SONIA. This risk
component is identified using the risk management systems of
NatWest Group. This risk component comprises the majority of the
hedged items fair value risk.
NatWest Group hedges the exchange rate risk of its net investment in
foreign currency denominated operations with currency borrowings
and forward foreign exchange contracts. NatWest Group reviews the
value of the investments’ net assets, executing hedges where
appropriate to reduce the sensitivity of capital ratios to foreign
exchange rate movement. Hedge accounting relationships will be
designated where required.
Exchange rate risk also arises in NatWest Group where payments are
denominated in different currencies than the functional currency.
Residual risk positions are hedged with forward foreign exchange
contracts. Exposure to the variability in future payments due to the
movement of foreign exchange rates is hedged, fixing the exchange
rate the payments will be settled in. The derivatives are documented
as cash flow hedges.
For all cash flow hedging and fair value hedge relationships NatWest
Group determines that there is an adequate level of offsetting between
the hedged item and hedging instrument by assessing the initial and
ongoing effectiveness by comparing movements in the fair value of the
expected highly probable forecast interest cash flows/fair value of the
hedged item attributable to the hedged risk with movements in the fair
value of the expected changes in cash flows from the hedging interest
rate swap. Hedge effectiveness is measured on a cumulative basis
over a time period management determines to be appropriate.
NatWest Group uses either the actual ratio between the hedged item
and hedging instrument(s) or one that minimises hedge ineffectiveness
to establish the hedge ratio for hedge accounting.
A number of the current cash flow and fair value hedges of interest
rate risk that mature post 31 December 2021 will be directly affected
by interest rate benchmark reform. NatWest Group early adopted the
amendments to IAS 39 and IFRS 7 issued in September 2019 for
reporting periods beginning 1 January 2019; these amendments are
known as Phase 1 relief. The relief allows, where uncertainty arising
from benchmark rate reform exists, the following:
When assessing if affected forecasted cash flows are highly
probable or still expected to occur; it is assumed the IBOR based
forecasted hedged cash flows are not altered as a result of interest
rate benchmark reform.
For the purpose of the prospective effectiveness assessment; it is
assumed the IBOR based hedged cash flows and/ or hedged risk
are not altered as a result of interest rate benchmark reform.
Hedge accounting relationships will not be discontinued if they fall
outside the 80 – 125% range when performing a retrospective
effectiveness assessment.
The assessment as to whether a non-contractually specified IBOR
risk component is separately identifiable, is done only at the
inception of the relationship.
The disclosures made for the notional of hedging instruments and risk
exposures affected by interest rate benchmark reform contain
information for both the hedging instrument and hedged risks even if
only one of these will be directly impacted by the reform.
NatWest Group early adopted the amendments to IAS 39 issued in
August 2020 for reporting periods beginning 1 January 2021; these
amendments are known as Phase 2 relief and apply at the point where
components of a hedge accounting relationships transition to
reference an alternative interest rate benchmark. Where relationships
have transitioned in the year, the impacted hedge accounting
relationships had their designations amended in line with the Phase 2
relief.
The following phase 2 reliefs have been applied:
Where forecasted cash flows in cash flow hedge relationships have
transitioned to an alternative benchmark interest rate, the relevant
hedge accounting designations have been amended.
As a result of the amended designations the balances in other
comprehensive income linked to the transitioned forecasted cash
flows are now deemed based on the alternative benchmark interest
rate.
NatWest Group Annual Report and Accounts 2020
284
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
10 Derivatives continued
Included in the table above are derivatives held for hedging purposes as follows:
Fair value hedging
Interest rate contracts
Cash flow hedging
Interest rate contracts
Exchange rate contracts
Net investment hedging
Exchange rate contracts
IFRS netting
2020
2019
Notional
£bn
Assets
£m
Changes in fair
value used for
hedge
Liabilities ineffectiveness (1)
£m
£m
Notional
£bn
Assets
£m
Liabilities
£m
Changes in fair
value used for
hedge
ineffectiveness (1)
£m
65.5
1,878
3,844
(875)
65.1
1,186
2,641
(585)
128.8
14.4
0.2
208.9
2,035
37
1,210
116
—
3,950
(3,857)
93
9
5,179
(5,049)
130
217
(52)
11
(699)
148.4
12.3
0.4
226.2
1,450
66
—
2,702
(2,500)
202
833
8
4
3,486
(3,464)
22
Note:
(1)
The change in fair value used for hedge ineffectiveness includes instruments that were decrecognised in the year.
The notional of hedging instruments affected by interest rate benchmark reform is as follows:
Fair value hedging
- EURIBOR
- GBP LIBOR
- USD LIBOR
- Other CCY LIBOR
Cash flow hedging
- EURIBOR
- GBP LIBOR
- USD LIBOR
2020
£bn
13.6
11.2
26.6
1.1
5.2
51.7
2.7
NatWest Group Annual Report and Accounts 2020
285
366
(59)
8
(270)
2019
£bn
11.1
13.6
26.6
—
3.4
47.2
2.1
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
10 Derivatives continued
The following table shows the period in which the hedging contract ends:
0-3 months
£bn
3-12 months
£bn
1-3 years
£bn
3-5 years
£bn
5-10 years
£bn
10-20 years
£bn
20+ years
£bn
2020
Fair value hedging
Hedging assets - interest rate risk
Hedging liabilities - interest rate risk
Cash flow hedging
Hedging assets
Interest rate risk
Average fixed interest rate (%)
Hedging liabilities
Interest rate risk
Average fixed interest rate (%)
Hedging assets
Exchange rate risk
Average JPY - € rate
Average JPY - £ rate
Average JPY - $ rate
Average USD - £ rate
Hedging liabilities
Exchange rate risk
Average USD - £ rate
Average INR - £ rate
Net investment hedging
Exchange rate risk
Principal currency hedges
Average SEK - £ rate
Average DKK - £ rate
Average NOK - £ rate
2019
Fair value hedging
Hedging assets - interest rate risk
Hedging liabilities - interest rate risk
Cash flow hedging
Hedging assets
Interest rate risk
Average fixed interest rate (%)
Hedging liabilities
Interest rate risk
Average fixed interest rate (%)
Exchange rate risk
Average USD - £ rate
Average INR - £ rate
Net investment hedging
Exchange rate risk
Principal currency hedges
Average SEK - £ rate
Average DKK - £ rate
Average NOK - £ rate
1.2
—
0.7
1.28
1.6
1.14
—
—
—
—
—
0.1
—
93.21
2.3
0.6
10.5
1.22
28.9
0.78
—
—
—
107.53
—
5.5
1.32
95.99
0.1
0.1
11.15
8.28
12.73
0.6
—
4.8
1.10
1.9
0.83
—
—
—
0.1
12.27
8.78
12.36
12.56
—
—
1.6
0.5
11.4
0.97
22.0
1.01
1.9
1.56
88.64
0.3
12.10
—
—
6.3
10.1
19.3
1.51
36.8
0.37
1.0
120.21
133.31
107.06
1.22
4.4
1.33
—
—
—
—
—
8.1
6.3
31.7
1.20
45.2
0.87
6.2
1.30
94.01
—
—
—
—
7.4
11.6
13.9
1.06
3.4
1.25
0.2
—
132.89
109.70
—
1.5
1.56
—
—
—
—
—
5.5
12.7
10.7
1.78
5.3
1.32
3.1
1.30
—
—
—
—
—
8.9
7.1
10.5
0.92
2.4
0.65
—
—
—
—
—
1.7
1.38
—
—
—
—
—
12.5
6.6
12.2
1.44
2.4
1.12
1.1
1.44
—
—
—
—
—
5.1
0.5
0.1
3.12
0.7
4.55
—
—
—
—
—
—
—
—
—
—
—
—
4.4
2.0
—
3.12
0.8
4.31
—
—
—
—
—
—
—
Total
£bn
35.4
30.1
55.0
1.23
73.8
0.64
1.2
120.21
132.93
107.44
1.22
13.2
1.36
95.29
0.2
11.53
8.28
12.73
4.2
0.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4.3
—
37.0
28.1
—
—
—
—
—
—
—
—
—
—
—
70.8
1.11
77.6
0.98
12.3
1.35
93.11
0.4
12.21
8.78
12.36
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
NatWest Group Annual Report and Accounts 2020
286
Notes to the consolidated financial statements
10 Derivatives continued
The table below analyses assets and liabilities, subject to hedging derivatives.
2020
Fair value hedging - interest rate
Loans to banks and customers - amortised cost
Other financial assets - securities
Total
Other financial liabilities - debt securities in issue
Subordinated liabilities
Total
Cash flow hedging - interest rate
Loans to banks and customers - amortised cost
Other financial assets - securities
Total
Cash flow hedging - interest rate
Bank and customer deposits
Other financial liabilities - debt securities in issue
Cash flow hedging - exchange rate
Other financial liabilities - debt securities in issue
Total
2019
Fair value hedging - interest rate
Loans to banks and customers - amortised cost
Other financial assets - securities
Total
Other financial liabilities - debt securities in issue
Subordinated liabilities
Total
Cash flow hedging - interest rate
Loans to banks and customers - amortised cost
Other financial assets - securities
Total
Cash flow hedging - interest rate
Bank and customer deposits
Other financial liabilities - debt securities in issue
Cash flow hedging - exchange rate
Other financial liabilities - debt securities in issue
Total
Carrying value
of hedged
assets and
liabilities
£m
Impact on
hedged items
included in
carrying value
£m
Changes in fair
value used as
a basis to
determine
ineffectiveness (1)
£m
Impact on
hedged items
ceased to be
adjusted for
hedging
gains or losses
£m
77
—
77
—
10
10
86
—
86
30
24
54
1,242
2,254
3,496
1,336
356
1,692
1,023
1,274
2,297
830
(275)
555
7,947
34,665
42,612
29,317
6,877
36,194
53,447
2,616
56,063
72,880
1,014
9,582
83,476
6,716
35,796
42,512
26,811
5,398
32,209
69,254
2,275
71,529
75,837
1,009
12,264
89,110
323
1,568
1,891
(746)
(268)
(1,014)
(601)
(16)
(617)
409
13
52
474
165
1,474
1,639
(807)
(222)
(1,029)
(566)
(16)
(582)
225
14
59
298
Note:
(1) The change in fair value used for hedge ineffectiveness instruments derecognised in the year.
NatWest Group Annual Report and Accounts 2020
287
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
10 Derivatives continued
The following risk exposures will be affected by interest rate benchmark reform (notional, hedged adjustment):
Fair value hedging
- EURIBOR
- GBP LIBOR
- USD LIBOR
- Other CCY LIBOR
Cash flow hedging
- EURIBOR
- GBP LIBOR
- USD LIBOR
- BOE Base rate (2)
- ECB REFI rate (2)
- SONIA (2)
2020
Notional
£bn
Hedged
adjustment
£m
2019 (1)
Notional
£bn
Hedged
adjustment
£m
15.1
11.4
28.1
1.1
4.1
10.5
2.7
40.7
1.2
0.6
27
1,178
(427)
1
(76)
(473)
(61)
(156)
—
4
12.7
13.9
27.3
0.8
3.3
9.6
2.0
37.5
0.1
0.1
93
1,211
(303)
—
(46)
(186)
5
(285)
—
—
Notes:
(1) 2019 has been restated to align the methodology used to identify hedge relationships subject to IBOR reform.
(2) Hedge relationships subject to reform are those where either the hedged item or the hedging instrument is subject to the IBOR reform.
The following table shows an analysis of cash flow hedge reserve and foreign exchange hedge reserve.
Continuing
Interest rate risk
Foreign exchange risk
De-designated
Interest rate
Foreign exchange risk
Total
Interest rate risk
Amount recognised in equity
Amount transferred from equity to net interest income
Foreign exchange risk
Amount recognised in equity
Amount transferred from equity to net interest income
Amount transferred from equity to non interest income
Amount transferred from equity to operating expenses
Total
Hedge ineffectiveness recognised in other operating income comprises:
Fair value hedging
Gains on the hedged items attributable to the hedged risk
Losses on the hedging instruments
Fair value hedging ineffectiveness
Cash flow hedging
- Interest rate risk
Cash flow hedging ineffectiveness
Total
2020
2019
Foreign
Foreign
Cash flow
hedge reserve
exchange
hedge reserve
Cash flow
hedge reserve
exchange
hedge reserve
£m
690
27
(424)
(1)
292
£m
—
(72)
—
(716)
(788)
£m
460
56
(494)
(2)
20
2020
2019
Cash flow
hedge reserve
Foreign
exchange
hedge
reserve
Cash flow
hedge reserve
£m
318
(19)
3
(35)
—
4
271
£m
—
—
(57)
—
2
—
(55)
2020
£m
877
(875)
2
22
22
24
£m
585
(243)
(12)
(36)
—
—
294
2019
£m
610
(585)
25
23
23
48
£m
—
(50)
—
(510)
(560)
Foreign
exchange
hedge
reserve
£m
—
—
83
—
2,752
—
2,835
2018
£m
54
(7)
47
(112)
(112)
(65)
The main sources of ineffectiveness for interest rate risk hedge accounting relationships are:
The effect of the counterparty credit risk on the fair value of the interest rate swap which is not reflected in the fair value of the hedged item
attributable to the change in interest rate (fair value hedge).
Differences in the repricing basis between the hedging instrument and hedged cash flows (cash flow hedge); and
Upfront present values on the hedging derivatives where hedge accounting relationships have been designated after the trade date (cash
flow hedge and fair value hedge).
Additional information on cash flow hedging and hedging of net assets can be found in the Statement of Changes in Equity.
NatWest Group Annual Report and Accounts 2020
288
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
11 Financial instruments – classification
The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments on an IFRS 9 basis. Assets
and liabilities outside the scope of IFRS 9 are shown within other assets and other liabilities.
Assets
Cash and balances at central banks
Trading assets
Derivatives (1)
Settlement balances
Loans to banks - amortised cost (2)
Loans to customers - amortised cost (3)
Other financial assets
Intangible assets
Other assets
31 December 2020
Cash and balances at central banks*
Trading assets
Derivatives (1)
Settlement balances
Loans to banks - amortised cost* (2)
Loans to customers - amortised cost (3)
Other financial assets
Intangible assets
Other assets
31 December 2019
Liabilities
Bank deposits (4)
Customer deposits
Settlement balances
Trading liabilities
Derivatives (1)
Other financial liabilities (5)
Subordinated liabilities
Notes in circulation
Other liabilities (6)
31 December 2020
Bank deposits (4)
Customer deposits
Settlement balances
Trading liabilities
Derivatives (1)
Other financial liabilities (5)
Subordinated liabilities
Notes in circulation
Other liabilities (6)
31 December 2019
FVOCI
£m
MFVTPL
£m
68,990
166,523
440
44,902
Amortised
cost
£m
124,489
2,297
6,955
360,544
9,806
235,953
44,902
504,091
76,745
150,029
715
49,283
80,993
4,387
7,554
326,947
11,454
227,489
49,283
431,335
Held-for-
trading
£m
DFV
£m
72,256
160,705
2,403
793
232,961
3,196
73,949
146,879
2,258
724
220,828
2,982
Amortised
cost
£m
20,606
431,739
5,545
43,408
9,169
2,655
1,882
515,004
20,493
369,247
4,069
42,962
9,255
2,109
1,920
450,055
Other
assets
£m
6,655
7,890
14,545
6,622
8,310
14,932
Other
liabilities
£m
4,506
4,506
5,618
5,618
Total
£m
124,489
68,990
166,523
2,297
6,955
360,544
55,148
6,655
7,890
799,491
80,993
76,745
150,029
4,387
7,554
326,947
61,452
6,622
8,310
723,039
Total
£m
20,606
431,739
5,545
72,256
160,705
45,811
9,962
2,655
6,388
755,667
20,493
369,247
4,069
73,949
146,879
45,220
9,979
2,109
7,538
679,483
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
Includes net hedging derivatives assets of £93 million (2019 - £202 million) and net hedging derivatives liabilities of £130 million (2019 - £22 million).
Includes items in the course of collection from other banks of £148 million (2019 - £50 million).
Includes finance lease receivables of £9,061 million (2019 - £9,212 million).
Includes items in the course of transmission to other banks of £12 million (2019 - £2 million).
Notes:
(1)
(2)
(3)
(4)
(5) The carrying amount of other customer accounts designated as at fair value through profit or loss is the same as the principal amount for both periods. No
amounts have been recognised in the profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial both during the
period and cumulatively.
Includes lease liabilities of £1,698 million (2019 - £1,823 million) held at amortised cost.
(6)
Judgment: classification of financial assets
Classification of financial assets between amortised cost and fair value through other comprehensive income requires a degree of judgement in
respect of business models and contractual cashflows.
The business model criteria is assessed at a portfolio level to determine whether assets are classified as held to collect or held to collect
and sell. Information that is considered in determining the applicable business model includes the portfolio’s policies and objectives, how the
performance and risks of the portfolio are managed, evaluated and reported to management; and the frequency, volume and timing of sales
in prior periods, sales expectation for future periods, and the reasons for sales.
The contractual cash flow characteristics of financial assets are assessed with reference to whether the cash flows represent SPPI. A level
of judgement is made in assessing terms that could change the contractual cash flows so that it would not meet the condition for SPPI are
considered, including contingent and leverage features, non-recourse arrangements and features that could modify the time value of
money.
NatWest Group Annual Report and Accounts 2020
289
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
11 Financial instruments - classification continued
NatWest Group's financial assets and liabilities include:
Reverse repos
Trading assets
Loans to banks - amortised cost
Loans to customers - amortised cost
Repos
Bank deposits
Customer deposits
Trading liabilities
2020
£m
2019
£m
19,404
153
25,011
6,470
5,167
19,036
24,095
165
10,649
2,597
1,765
27,885
The tables below present information on financial assets and financial liabilities that are offset on the balance sheet under IFRS or subject to
enforceable master netting agreements together with financial collateral received or given.
Instruments which can be offset
Potential for offset not recognised by IFRS
2020
Derivative assets
Derivative liabilities
Net position (1)
Trading reverse repos
Trading repos
Net position
Non trading reverse repos
Non trading repos
Net position
2019
Derivative assets
Derivative liabilities
Net position (1)
Trading reverse repos
Trading repos
Net position
Non trading reverse repos
Non trading repos
Net position
Gross
£m
176,425
171,614
4,811
43,908
42,203
1,705
36,117
22,590
13,527
158,850
154,396
4,454
52,007
54,131
(2,124)
21,341
14,889
6,452
IFRS
offset
£m
(10,807)
(11,540)
733
(24,867)
(24,867)
—
(10,953)
(10,953)
—
(10,913)
(11,724)
811
(28,720)
(28,720)
—
(10,527)
(10,527)
—
Effect of
master netting
and similar
agreements
£m
(137,086)
(137,086)
collateral
£m
(19,608)
(15,034)
— (4,574)
Cash Securities
collateral
£m
(5,053)
(4,921)
(132)
Instruments
Net amount after
outside
the effect of netting
agreements and
netting
related collateral agreements
£m
£m
3,871
3,033
838
Balance
sheet total
£m
905 166,523
631 160,705
5,818
274
(929)
(929)
—
—
—
—
— (18,040)
— (16,407)
— (1,633)
— (25,164)
— (11,637)
— (13,527)
72
—
72
—
—
—
363
1,700
(1,337)
19,404
19,036
368
— 25,164
— 11,637
— 13,527
Balance
sheet
£m
165,618
160,074
5,544
19,041
17,336
1,705
25,164
11,637
13,527
147,937
142,672
5,265
(122,697)
(122,697)
(18,685)
(17,296)
— (1,389)
(4,292)
(1,276)
(3,016)
2,263
1,403
860
2,092 150,029
4,207 146,879
3,150
(2,115)
23,287
25,411
(2,124)
10,814
4,362
6,452
(562)
(562)
—
—
—
—
— (22,364)
— (24,849)
2,485
—
— (10,814)
— (4,362)
— (6,452)
361
—
361
—
—
—
808
2,474
(1,666)
24,095
27,885
(3,790)
— 10,814
4,362
—
6,452
—
Note:
(1) The net IFRS offset balance of £733 million (2019 - £811 million) relates to variation margin netting reflected on other balance sheet lines.
NatWest Group Annual Report and Accounts 2020
290
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
11 Financial instruments - classification continued
Interest rate benchmark reform
In 2020 NatWest Group continued to implement its entity-wide LIBOR
programme with the view of being ready for the various transition
events that are expected to occur prior to the cessation of the vast
majority of the IBOR benchmark rates at the end of 2021 and the USD
LIBOR in 2023. In the UK, regulators, most notably the Bank of
England (BoE) and the Financial Conduct Authority (FCA), have
issued guidance on how market participants are expected to approach
transition as well as the regulatory expectations in relation to the credit
adjustment spread calculation methodologies, conversion strategies
amongst, existence of products referencing IBOR benchmark rates
amongst other items.
The group-wide programme continued to address the key areas that
will be affected by the IBOR reform most notably:
Client stratification, engagement and education;
Contract fall-back remediation;
Transition on an economically equivalent basis;
Effect of modifications to existing terms beyond those that are
attributable to the IBOR reform;
Funding and liquidity management, planning and forecast;
Risk management;
Financial reporting and valuation; and,
Changes to processes and systems covering front-end, risk and
finance systems.
NatWest Group continued to develop new products across its different
segments that reference the new alternative risk-free rates and worked
with clients to assess their readiness and ability to adopt new products
or transition existing products. A comprehensive review of the effect of
IBOR reform on funding, liquidity and risk management has also been
conducted. This is expected to be fully implemented over the course of
2021. NatWest Group will continue to adapt its key systems,
methodologies and processes to meet the requirements of the new
risk-free rates. This is expected to be concluded in advance of the
LIBOR cessation date at the end of 2021.
NatWest Group also remained engaged with regulators, standard
setters and other market participants on key matters related to the
IBOR reform and an open dialogue is expected throughout 2021. It is
expected that the programme will meet all timelines set by the
regulators.
The table below provides an overview of IBOR related exposure by
currency and nature of financial instruments. Non-derivative financial
instruments are presented on the basis of their carrying amounts
excluding expected credit losses while derivative financial instruments
are presented on the basis of their notional amount.
Trading assets
Loans to banks - amortised cost
Loans to customers - amortised cost
Other financial assets
Bank deposits
Customer deposits
Trading liabilities
Other financial liabilities
Subordinated liabilities
Loan commitments (2)
Rates subject to IBOR reform
GBP LIBOR
£m
75
23
39,858
2,847
USD IBOR (1)
£m
60
82
5,289
303
EUR IBOR
£m
348
101
4,950
370
Other IBOR
£m
1
—
234
71
—
—
54
1,116
8
25,616
—
—
301
9,792
1,286
9,228
—
—
269
5,902
438
7,176
—
4
2
146
—
682
Balances not
subject to
IBOR reform
£m
68,506
6,751
316,200
51,568
20,606
431,735
71,630
28,856
8,230
79,220
Expected
credit losses
£m
—
(2)
(5,987)
(11)
Total
£m
68,990
6,955
360,544
55,148
20,606
431,739
72,256
45,812
9,962
121,922
Derivatives notional (£bn)
1,407.5
1,368.8
2,358.8
289.6
8,622.1
14,046.8
Notes:
(1) USD LIBOR is now expected to convert to alternative risk free rates in mid-2023 subject to consultation.
(2) Certain loan commitments are multi-currency facilities. Where these are fully undrawn, they are allocated to the principal currency of the facility. Where the
facilities are partly drawn, the remaining loan commitment is allocated to the currency with the largest drawn amount.
Included within the table above for derivatives were currency swaps with corresponding legs also subject to IBOR reform of GBP LIBOR of £5.2
billion with USD IBOR £2.0 billion, EUR IBOR £2.9 billion and Other IBOR £0.3 billion. Currency swaps of USD IBOR of £231.7 billion with GBP
LIBOR £98.5 billion, EUR IBOR £85.8 billion and Other IBOR £47.4 billion. Currency swaps of EUR IBOR of £5.1 billion with GBP LIBOR
£2.3billion, USD IBOR £1.8 billion and Other IBOR £1.0 billion. Currency swaps of Other IBOR of £2.2 billion with EUR IBOR £0.7 billion, USD
IBOR £1.2 billion and Other IBOR £0.3 billion.
Additionally, included above are basis swaps for GBP LIBOR of £97.0 billion, USD IBOR of £ 81.0 billion, EUR IBOR of £49.0 billion and Other
IBOR of £10.0 billion.
AT1 issuances
NatWest Group has issued certain capital instruments (AT1), under which reset clauses are linked to IBOR rates subject to reform. Where under
the contractual terms of the instrument the coupon resets to a rate which has IBOR as a specified component of its pricing structure, these are
subject to IBOR reform and listed below:
US$ 1.15 billion 8% notes
US$ 2.65 billion 8.625% notes
NatWest Group‘s non-cumulative preference shares of USD$0.01 Series U (£494 million) is also subject to IBOR reform.
£m
734
2,046
NatWest Group Annual Report and Accounts 2020
291
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
12 Financial instruments - valuation
Critical accounting policy: Fair value - financial instruments
In accordance with Accounting policies 12 and 20, financial
instruments classified as mandatory fair value through profit or loss,
held-for-trading or designated as at fair value through profit or loss and
financial assets classified as fair value through other comprehensive
income are recognised in the financial statements at fair value. All
derivatives are measured at fair value.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date. A fair value measurement takes into
account the characteristics of the asset or liability if market participants
would take those characteristics into account when pricing the asset or
liability at the measurement date. It also uses the assumptions that
market participants would use when pricing the asset or liability. In
determining fair value, NatWest Group maximises the use of relevant
observable inputs and minimises the use of unobservable inputs.
Modelled approaches may be used to measure instruments classed as
level 2 or 3. Estimation expertise is required in the selection,
implementation and calibration of appropriate models. The resulting
modelled valuations are considered for accuracy and reliability.
Portfolio level adjustments consistent with IFRS 13 are raised to
incorporate counterparty credit risk, funding and margining risks.
Expert judgement is used in the initial measurement of modelled
products by control teams.
Where NatWest Group manages a group of financial assets and
financial liabilities on the basis of its net exposure to either market
risks or credit risk, it measures the fair value of a group of financial
assets and financial liabilities on the basis of the price that it would
receive to sell a net long position (i.e. an asset) for a particular risk
exposure or to transfer a net short position (i.e. a liability) for a
particular risk exposure in an orderly transaction at the measurement
date under current market conditions.
Credit valuation adjustments are made when valuing derivative
financial assets to incorporate counterparty credit risk. Adjustments
are also made when valuing financial liabilities measured at fair value
to reflect the NatWest Group’s own credit standing.
Where the market for a financial instrument is not active, fair value is
established using a valuation technique. These valuation techniques
involve a degree of estimation, the extent of which depends on the
instrument’s complexity and the availability of market-based data.
Further details about the valuation methodologies and the sensitivity to
reasonably possible alternative assumptions of the fair value of
financial instruments valued using techniques where at least one
significant input is unobservable are given below.
Assets
Trading assets
Loans
Securities
Derivatives
Other financial assets
Loans
Securities
Total financial assets held at fair value
Liabilities
Trading liabilities
Deposits
Debt securities in issue
Short positions
Derivatives
Other financial liabilities
Debt securities in issue
Other deposits
Subordinated liabilities
Total financial liabilities held at fair value
Level 1
£m
2020
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
2019
Level 2
£m
Level 3
£m
Total
£m
—
21,535
39,550
7,599
— 165,441
—
35,972
57,507
185
8,850
221,625
—
—
19,045
44,062
1,408
7,734
— 159,818
—
—
—
19,045
1,607
796
793
216,218
225
81
1,082
168
167
1,723
7
—
—
887
—
—
—
894
39,775
29,215
166,523
353
44,989
280,855
44,069
1,408
26,779
160,705
1,607
796
793
236,157
—
20,865
46,172
8,704
— 148,800
—
41,044
61,909
307
8,326
212,309
—
—
15,565
50,944
1,703
5,622
— 145,818
—
—
—
15,565
2,117
—
724
206,928
449
555
1,229
58
263
2,554
56
59
—
1,061
141
—
—
1,317
46,621
30,124
150,029
365
49,633
276,772
51,000
1,762
21,187
146,879
2,258
—
724
223,810
Notes:
(1) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instrument was transferred. There were no significant
transfers between level 1 and level 2.
(2) For an analysis of debt securities held at mandatory fair value through profit or loss by issuer as well as ratings and derivatives, by type and contract, refer to
Risk and capital management – Credit risk.
(3) The determination of an instrument’s level cannot be made at a global product level as a single product type can be in more than one level. For example, a
single name corporate credit default swap could be in level 2 or level 3 depending on whether the reference counterparty’s obligations are liquid or illiquid.
NatWest Group Annual Report and Accounts 2020
292
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
12 Financial instruments - valuation continued
Fair value hierarchy
Financial Instruments carried at fair value have been classified under
the IFRS fair value hierarchy as follows.
Level 1 – instruments valued using unadjusted quoted prices in active
and liquid markets, for identical financial instruments. Examples
include government bonds, listed equity shares and certain exchange-
traded derivatives.
Level 2 - instruments valued using valuation techniques that have
observable inputs. Examples include most government agency
securities, investment-grade corporate bonds, certain mortgage
products, including CLOs, most bank loans, repos and reverse repos,
less liquid listed equities, state and municipal obligations, most notes
issued, certain money market securities, loan commitments and most
OTC derivatives.
Level 3 - instruments valued using a valuation technique where at
least one input which could have a significant effect on the
instrument’s valuation, is not based on observable market data.
Examples include cash instruments which trade infrequently, certain
syndicated and commercial mortgage loans, certain emerging markets
and derivatives with unobservable model inputs.
Valuation techniques
NatWest Group derives the fair value of its instruments differently
depending on whether the instrument is a non-modelled or a modelled
product.
Non-modelled products are valued directly from a price input, typically
on a position by position basis, and include cash, equities and most
debt securities.
Modelled products valued using a pricing model range in complexity
from comparatively vanilla products such as interest rate swaps and
options (e.g. interest rate caps and floors) through to more complex
derivatives. The valuation of modelled products requires an
appropriate model and inputs into this model. Sometimes models are
also used to derive inputs (e.g. to construct volatility surfaces).
NatWest Group uses a number of modelling methodologies.
Inputs to valuation models
Values between and beyond available data points are obtained by
interpolation and extrapolation. When utilising valuation techniques,
the fair value can be significantly affected by the choice of valuation
model and by underlying assumptions concerning factors such as the
amounts and timing of cash flows, discount rates and credit risk. The
principal inputs to these valuation techniques are as follows:
Bond prices - quoted prices are generally available for government
bonds, certain corporate securities and some mortgage-related
products.
Credit spreads - where available, these are derived from prices of
credit default swaps or other credit based instruments, such as debt
securities. For others, credit spreads are obtained from third-party
benchmarking services. For counterparty credit spreads, adjustments
are made to market prices (or parameters) when the creditworthiness
of the counterparty differs from that of the assumed counterparty in the
market price (or parameters).
Interest rates - these are principally benchmark interest rates such as
the London Interbank Offered Rate (LIBOR), Overnight Index Swaps
(OIS) rate and other quoted interest rates in the swap, bond and
futures markets.
Foreign currency exchange rates - there are observable prices both for
spot and forward contracts and futures in the world's major currencies.
Equity and equity index prices - quoted prices are generally readily
available for equity shares listed on the world's major stock exchanges
and for major indices on such shares.
Commodity prices - many commodities are actively traded in spot and
forward contracts and futures on exchanges in London, New York and
other commercial centres.
Price volatilities and correlations - volatility is a measure of the
tendency of a price to change with time. Correlation measures the
degree which two or more prices or other variables are observed to
move together.
Prepayment rates - the fair value of a financial instrument that can be
prepaid by the issuer or borrower differs from that of an instrument that
cannot be prepaid. In valuing prepayable instruments that are not
quoted in active markets, NatWest Group considers the value of the
prepayment option.
Recovery rates/loss given default - these are used as an input to
valuation models and reserves for asset-backed securities and other
credit products as an indicator of severity of losses on default.
Recovery rates are primarily sourced from market data providers or
inferred from observable credit spreads.
Valuation control
NatWest Group's control environment for the determination of the fair
value of financial instruments includes formalised protocols for the
review and validation of fair values independent of the businesses
entering into the transactions.
Independent price verification (IPV) is a key element of the control
environment. Valuations are first performed by the business which
entered into the transaction. Such valuations may be directly from
available prices, or may be derived using a model and variable model
inputs. These valuations are reviewed, and if necessary amended, by
a team independent of those trading the financial instruments, in the
light of available pricing evidence.
Where measurement differences are identified through the IPV
process these are grouped by fair value level and quality of data. If the
size of the difference exceeds defined thresholds adjustment to
independent levels are made.
IPV takes place at least each monthly, for all fair value positions. The
IPV control includes formalised reporting and escalation of any
valuation differences in breach of established thresholds.
The Model Oversight Review Committee sets the policy for model
documentation, testing and review, and prioritises models with
significant exposure being reviewed by the NatWest Group Model Risk
team. Valuation Committees are made up of valuation specialists and
senior business representatives from various functions and oversees
pricing, reserving and valuations issues. These committees meet
monthly to review and ratify any methodology changes. The Executive
Valuation Committee meets quarterly to address key material and
subjective valuation issues, to review items escalated by Valuation
Committees and to discuss other relevant matters, including prudential
valuation.
Initial classification of a financial instrument is carried out by the
Product Control team following the principles in IFRS 13. They base
their judgment on information gathered during the IPV process for
instruments which include the sourcing of independent prices and
model inputs. The quality and completeness of the information
gathered in the IPV process gives an indication as to the liquidity and
valuation uncertainty of an instrument. These initial classifications are
subject to senior management review. Particular attention is paid to
instruments crossing from one level to another, new instrument
classes or products, instruments that are generating significant profit
and loss and instruments where valuation uncertainty is high.
NatWest Group uses consensus prices for the IPV of some
instruments. The consensus service encompasses the equity, interest
rate, currency, commodity, credit, property, fund and bond markets,
providing comprehensive matrices of vanilla prices and a wide
selection of exotic products.
NatWest Group Annual Report and Accounts 2020
293
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
12 Financial instruments - valuation continued
NatWest Group contributes to consensus pricing services where there
is a significant interest either from a positional point of view or to test
models for future business use. Data sourced from consensus pricing
services are used for a combination of control processes including
direct price testing, evidence of observability and model testing. In
practice this means that NatWest Group submits prices for all material
positions for which a service is available.
Data from consensus services are subject to the same level of quality
review as other inputs used for IPV process. All sources of
independent data are reviewed for quality and are applied in the IPV
processes using a formalised input quality hierarchy.
Credit valuation adjustments (CVA)
CVA represents an estimate of the adjustment to fair value that a
market participant would make to incorporate the counterparty credit
risk inherent in derivative exposures. CVA is actively managed by a
credit and market risk hedging process, and therefore movements in
CVA are partially offset by trading revenue on the hedges.
The CVA is calculated on a portfolio basis reflecting an estimate of the
amount a third party would charge to assume the credit risk.
Collateral held under a credit support agreement is factored into the
CVA calculation. In such cases where NatWest Group holds collateral
against counterparty exposures, CVA is held to the extent that residual
risk remains.
In order to determine a reliable fair value, where appropriate,
management applies valuation adjustments to the pricing information
gathered from the above sources. The sources of independent data
are reviewed for quality and are applied in the IPV processes using a
formalised input quality hierarchy. These adjustments reflect NatWest
Group's assessment of factors that market participants would consider
in setting a price.
Bid-offer
Fair value positions are adjusted to bid (long positions) or offer (short
positions) levels, by marking individual cash positions directly to bid or
offer or by taking bid-offer reserves calculated on a portfolio basis for
derivatives exposures. The bid-offer approach is based on current
market spreads and standard market bucketing of risk.
Where unobservable inputs are used, NatWest Group may determine
a range of possible valuations derived from differing stress scenarios
to determine the sensitivity associated with the valuation. When
establishing the fair value of a financial instrument using a valuation
technique, NatWest Group considers adjustments to the modelled
price which market participants would make when pricing that
instrument. Such adjustments include the credit quality of the
counterparty and adjustments to compensate for model limitations.
When valuing financial instruments in the trading book, adjustments
are made to mid-market valuations to cover bid-offer spread, funding
and credit risk. These adjustments are presented in the table below:
Bid-offer spreads vary by maturity and risk type to reflect different
spreads in the market. For positions where there is no observable
quote, the bid-offer spreads are widened in comparison to proxies to
reflect reduced liquidity or observability. Bid-offer methodologies may
also incorporate liquidity triggers whereby wider spreads are applied to
risks above pre-defined thresholds.
As permitted by IFRS 13, netting is applied on a portfolio basis to
reflect the value at which NatWest Group believes it could exit the
portfolio, rather than the sum of exit costs for each of the portfolio’s
individual trades. This is applied where the asset and liability positions
are managed as a portfolio for risk and reporting purposes.
Adjustment
Funding – FVA
Credit – CVA
Bid – Offer
Product and deal specific
2020
£m
140
390
148
172
850
2019
£m
244
386
165
238
1,033
The discount rates applied to derivative cash flows in determining fair
value reflect any underlying collateral agreements. Collateralised
derivatives are generally discounted at the relevant OIS-related rates
at an individual trade level. Reserves are held to the extent that the
discount rates applied do not reflect all of the terms of the collateral
agreements.
The reduction in valuation reserves was primarily driven by a
combination of market moves, trade close-out activity and risk
reduction together with a reallocation of product and deal specific
reserves that are now included within modelled trade valuations.
Funding valuation adjustment (FVA)
FVA represents an estimate of the adjustment that a market participant
would make to incorporate funding costs and benefits that arise in
relation to derivative exposures. FVA is calculated as a portfolio level
adjustment and can result in either a funding charge or funding benefit.
Product and deal specific
On initial recognition of financial assets and liabilities valued using
valuation techniques incorporating information other than observable
market data, any difference between the transaction price and that
derived from the valuation technique is deferred. Such amounts are
recognised in profit or loss over the life of the transaction; when market
data becomes observable; or when the transaction matures or is
closed out as appropriate. At 31 December 2020, net gains of £63
million (2019 - £88 million) were carried forward. During the year, net
gains of £75 million (2019 - £183 million) were deferred and £100
million (2019 - £154 million) were recognised in the income statement.
Funding levels are applied to estimated potential future exposures. For
uncollateralised derivatives, the modelling of the exposure is
consistent with the approach used in the calculation of CVA, and the
counterparty contingent nature of the exposure is reflected in the
calculation. For collateralised derivatives, the exposure reflects initial
margin posting requirements.
Where system generated valuations do not accurately recover market
prices, manual valuation adjustments are applied either at a position or
portfolio level. Manual adjustments are subject to the scrutiny of
independent control teams and are subject to monthly review by senior
management.
Own Credit
NatWest Group takes into account the effect of its own credit standing
when valuing financial liabilities recorded at fair value in accordance
with IFRS. Own credit spread adjustments are made when valuing
issued debt held at fair value, including issued structured notes. An
own credit adjustment is applied to positions where it is believed that
counterparties would consider NWM Group’s creditworthiness when
pricing trades.
NatWest Group Annual Report and Accounts 2020
294
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
12 Financial instruments – valuation: Level 3 ranges of unobservable inputs
Financial instrument
Valuation technique
Unobservable inputs
Units
Low
High
2020
Trading assets and Other financial assets
Loans
Price-based
Discount cash flow
Discount cash flow
Price
Credit spreads
Discount margin
Debt securities
Price-based
Price
Equity Shares
Price-based
Market comparables
Discount cash flow
Net asset valuation
Price
Price
Discount margin
Net asset value
Trading liabilities and Other financial liabilities
Deposits
Price-based
Yield analysis
Price
Day count
Debt securities in issue
Price-based
Price
Derivative assets and liabilities
Credit derivatives
Credit derivative pricing
Interest rate & FX
derivatives
Option pricing
Credit spreads
Correlation
Volatility
Upfront points
Recovery rate
Correlation
Volatility
Constant Prepayment
Rate
Mean Reversion
Basis volatility
Inflation volatility
Inflation rate
Equity derivatives
Option pricing
Correlation
%
bps
bps
%
GBP
%
%
%
%
Number
CCY
bps
%
%
%
%
%
%
%
%
bps
%
%
%
—
69
51
—
—
—
7
80
—
—
—
2
(50)
27
—
10
(50)
17
2
—
15
1
1
(53)
2019
Low
—
53
—
—
—
—
6
80
—
65
High
101
101
—
246
25,914
80
9
120
98
95
105
119
226
232
27,737
80
9
120
100
—
—
44 JPY
146 EUR
500
95
80
100
40
100
60
18
92
21
2
2
87
6
(50)
27
—
10
(50)
19
2
—
—
1
1
(53)
500
80
80
99
40
99
70
15
92
—
2
2
87
Notes:
(1) The table above presents the range of values for significant inputs used in the valuation of level 3 assets and liabilities. The range represents the highest and
lowest values of the input parameters and therefore is not a measure of parameter uncertainty. Movements in the underlying input may have a favourable or
unfavourable impact on the valuation depending on the particular terms of the contract and the exposure. For example, an increase in the credit spread of a
bond would be favourable for the issuer but unfavourable for the note holder. Whilst NatWest Group indicates where it considers that there are significant
relationships between the inputs, their inter-relationships will be affected by macro economic factors including interest rates, foreign exchange rates or equity
index levels.
(2) Credit spreads and discount margins: credit spreads and margins express the return required over a benchmark rate or index to compensate for the credit risk
associated with a cash instrument. A higher credit spread would indicate that the underlying instrument has more credit risk associated with it. Consequently,
investors require a higher yield to compensate for the higher risk.
(3) Price and yield: There may be a range of prices used to value an instrument that may be a direct comparison of one instrument or portfolio with another or,
movements in a more liquid instrument may be used to indicate the movement in the value of a less liquid instrument. The comparison may also be indirect in
that adjustments are made to the price to reflect differences between the pricing source and the instrument being valued.
(4) Recovery rate: reflects market expectations about the return of principal for a debt instrument or other obligations after a credit event or on liquidation. Recovery
rates tend to move conversely to credit spreads.
(5) Valuation: for private equity investments, values may be estimated by looking at past prices of similar stocks and from valuation statements where valuations
are usually derived from earnings measures such as EBITDA or net asset value (NAV). Similarly for equity or bond fund investments, prices may be estimated
from valuation or credit statements using NAV or similar measures.
(6) Correlation: measures the degree by which two prices or other variables are observed to move together. If they move in the same direction there is positive
correlation; if they move in opposite directions there is negative correlation. Correlations typically include relationships between: default probabilities of assets in
a basket (a group of separate assets), exchange rates, interest rates and other financial variables.
(7) Volatility: a measure of the tendency of a price to change with time.
(8)
(9) Upfront points: where CDS contracts are standardised, the inherent spread of the trade may exceed the standard premium paid or received under the contract.
Interest rate delta: these ranges represent the low/high marks on the relevant discounting curve.
Upfront points will compensate for the difference between the standard premium and the actual premium at the start of the contract.
(10) Mean reversion: a measure of how much a rate reverts to its mean level.
(11) Constant prepayment rate: the rate is used to reflect how fast a pool of assets pay down.
(12) Day count: yield analysis on deposits are calculated using day count as an input, referring to the maturity of the deposit.
(13) NatWest Group does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
NatWest Group Annual Report and Accounts 2020
295
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
12 Financial instruments – valuation: areas of judgment
Whilst the business has simplified, the diverse range of products
historically traded by NatWest Group results in a wide range of
instruments that are classified into level 3 of the hierarchy. Whilst the
majority of these instruments naturally fall into a particular level, for
some products an element of judgment is required. The majority of
NatWest Group financial instruments carried at fair value are classified
as level 2. IFRS requires extra disclosures in respect of level 3
instruments.
Active and inactive markets
A key input in the decision making process for the allocation of assets
to a particular level is market activity. In general, the degree of
valuation uncertainty depends on the degree of liquidity of an input.
Where markets are liquid, little judgment is required. However, when
the information regarding the liquidity in a particular market is not
clear, a judgment may need to be made. This can be more difficult as
assessing the liquidity of a market is not always straightforward. For an
equity traded on an exchange, daily volumes of trading can be seen,
but for an over-the-counter (OTC) derivative assessing the liquidity of
the market with no central exchange is more difficult.
A key related matter is where a market moves from liquid to illiquid or
vice versa. Where this change is considered to be temporary, the
classification is not changed. For example, if there is little market
trading in a product on a reporting date but at the previous reporting
date and during the intervening period the market has been
considered to be liquid, the instrument will continue to be classified in
the same level in the hierarchy. This is to provide consistency so that
transfers between levels are driven by genuine changes in market
liquidity and do not reflect short term or seasonal effects. Material
movements between levels are reviewed quarterly.
The breadth and depth of the IPV data allows for a rules based quality
assessment to be made of market activity, liquidity and pricing
uncertainty, which assists with the process of allocation to an
appropriate level. Where suitable independent pricing information is
not readily available, the quality assessment will result in the
instrument being assessed as level 3.
Modelled products
For modelled products the market convention is to quote these trades
through the model inputs or parameters as opposed to a cash price
equivalent. A mark-to-market is derived from the use of the
independent market inputs calculated using NatWest Group’s model.
Assets
Trading assets
Loans
Securities
Derivatives
Other financial assets
Loans
Securities
Liabilities
Trading liabilities
Deposits
Debt securities in issue
Derivatives
Other financial liabilities - debt securities in issue
The decision to classify a modelled instrument as level 2 or 3 will be
dependent upon the product/model combination, the observability and
quality of input parameters and other factors. All these must be
assessed to classify the asset. If an input fails the observability or
quality tests then the instrument is considered to be in level 3 unless
the input can be shown to have an insignificant effect on the overall
valuation of the product.
The majority of derivative instruments, for example vanilla interest rate
swaps, foreign exchange swaps and liquid single name credit
derivatives, are classified as level 2 as they are vanilla products valued
using observable inputs. The valuation uncertainty on these is
considered to be low and both input and output testing may be
available.
Non-modelled products
Non-modelled products are generally quoted on a price basis and can
therefore be considered for each of the three levels. This is determined
by the market activity, liquidity and valuation uncertainty of the
instruments which is in turn measured from the availability of
independent data used by the IPV process to allocate positions to IPV
quality levels.
The availability and quality of independent pricing information are
considered during the classification process. An assessment is made
regarding the quality of the independent information. For example,
where consensus prices are used for non-modelled products, a key
assessment of the quality of a price is the depth of the number of
prices used to provide the consensus price. If the depth of contributors
falls below a set hurdle rate, the instrument is considered to be level 3.
This hurdle rate is that used in the IPV process to determine the IPV
quality rating. However, where an instrument is generally considered
to be illiquid, but regular quotes from market participants exist, these
instruments may be classified as level 2 depending on frequency of
quotes, other available pricing and whether the quotes are used as
part of the IPV process or not.
For some instruments with a wide number of available price sources,
there may be differing quality of available information and there may
be a wide range of prices from different sources. In these situations
the highest quality source is used to determine the classification of the
asset. For example, a tradable quote would be considered a better
source than a consensus price.
2020
2019
Level 3
Favourable Unfavourable
Level 3
Favourable Unfavourable
£m
225
81
1,082
168
167
1,723
7
—
887
—
894
£m
10
—
80
20
30
140
—
—
50
—
50
£m
£m
£m
£m
—
—
(80)
(10)
(20)
(110)
—
—
(40)
—
(40)
449
555
1,229
58
263
2,554
56
59
1,061
141
1,317
10
—
180
—
80
270
—
—
100
10
110
(10)
—
(180)
—
(20)
(210)
—
—
(90)
(10)
(100)
NatWest Group Annual Report and Accounts 2020
296
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
12 Financial instruments – valuation: level 3 sensitivities
The level 3 sensitivities presented above are calculated at a trade or
low level portfolio basis. They are not calculated on an overall portfolio
basis and therefore do not reflect the likely potential uncertainty on the
portfolio as a whole. The figures are aggregated and do not reflect the
correlated nature of some of the sensitivities. In particular, for some of
the portfolios the sensitivities may be negatively correlated where a
downwards movement in one asset would produce an upwards
movement in another, but due to the additive presentation of the above
figures this correlation cannot be displayed. The actual potential
downside sensitivity of the total portfolio may be less than the non-
correlated sum of the additive figures as shown in the above table.
Reasonably plausible alternative assumptions of unobservable inputs
are determined based on a specified target level of certainty of 90%.
The assessments recognise different favourable and unfavourable
valuation movements where appropriate. Each unobservable input
within a product is considered separately and sensitivity is reported on
an additive basis.
Alternative assumptions are determined with reference to all available
evidence including consideration of the following: quality of
independent pricing information taking into account consistency
between different sources, variation over time, perceived tradability or
otherwise of available quotes; consensus service dispersion ranges;
volume of trading activity and market bias (e.g. one-way inventory);
day 1 profit or loss arising on new trades; number and nature of
market participants; market conditions; modelling consistency in the
market; size and nature of risk; length of holding of position; and
market intelligence.
Other considerations
Whilst certain inputs used to calculate CVA, FVA and own credit
adjustments are not based on observable market data, the uncertainty
of the inputs is not considered to have a significant effect on the net
valuation of the related derivative portfolios and issued debt. The
classification of the derivative portfolios and issued debt is not
determined by the observability of these inputs and any related
sensitivity does not form part of the level 3 sensitivities presented.
Level 3
The following table shows the movement in level 3 assets and liabilities in the year.
At 1 January
Amounts recorded in the income statement (1)
Amounts recorded in the statement of comprehensive income
Level 3 transfers in
Level 3 transfers out
Issuances
Purchases
Settlements
Sales
Foreign exchange and other adjustments
At 31 December
Amounts recorded in the income statement in respect
of balances held at year end
- unrealised
Trading
assets (2)
£m
2,233
127
—
165
(139)
—
441
(293)
(1,148)
2
1,388
2020
Other
financial
assets (3)
£m
321
(21)
63
261
Total
assets
£m
2,554
106
63
426
— (139)
—
—
605
164
(446)
(153)
(1,449)
(301)
3
1
1,723
335
Total
liabilities
£m
1,317
(67)
—
188
(368)
—
127
(59)
(245)
1
894
2019
Other
Trading financial
assets (2) assets (3)
£m
643
(1)
86
2
(59)
—
15
(38)
(326)
(1)
321
£m
2,657
(418)
—
492
(857)
—
1,121
(218)
(541)
(3)
2,233
Total
assets
£m
3,300
(419)
86
494
(916)
—
1,136
(256)
(867)
(4)
2,554
Total
liabilities
£m
1,957
162
—
104
(588)
46
532
(429)
(466)
(1)
1,317
129
(22)
107
(68)
(421)
8
(413)
110
Notes:
(1) There were £194 million net gain on trading assets and liabilities (2019 – £596 million losses) recorded in income from trading activities. Net losses on other
instruments of £21 million (2019 – £15 million gain) were recorded in other operating income and interest income as appropriate.
(2) Trading assets comprise assets held at fair value in trading portfolios.
(3) Other financial assets comprise fair value through other comprehensive income, designated as at fair value through profit or loss and other fair value through
profit or loss.
NatWest Group Annual Report and Accounts 2020
297
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
12 Financial instruments: fair value of financial instruments measured at amortised cost
The following table shows the carrying value and fair value of financial instruments measured at amortised cost on the balance sheet.
2020
Financial assets
Cash and balances at central banks
Settlement balances
Loans to banks
Loans to customers
Other financial assets - securities
Financial liabilities
Bank deposits
Customer deposits
Settlement balances
Other financial liabilities - debt securities in issue
Subordinated liabilities
Notes in circulation
2019
Financial assets
Cash and balances at central banks*
Settlement balances
Loans to banks*
Loans to customers
Other financial assets - securities
Financial liabilities
Bank deposits
Customer deposits
Settlement balances
Other financial liabilities - debt securities in issue
Subordinated liabilities
Notes in circulation
Items where fair value
approximates
carrying value
£bn
Carrying
value
£bn
Fair value hierarchy level
Fair value
£bn
Level 1
£bn
Level 2
£bn
Level 3
£bn
124.5
2.3
0.1
4.4
371.7
5.5
2.7
81.0
4.4
4.1
312.4
4.1
2.1
6.9
360.5
9.8
16.2
60.0
43.4
9.2
7.6
326.9
11.5
16.4
56.8
43.0
9.3
6.9
359.2
10.1
16.2
60.1
44.6
9.8
7.6
324.0
11.6
16.5
56.9
43.7
10.0
—
—
5.9
—
—
—
—
—
—
5.9
—
—
—
—
3.8
25.2
1.2
11.3
10.1
34.7
9.7
4.3
11.0
2.8
12.2
7.5
38.5
9.9
3.1
334.0
3.0
4.9
50.0
9.9
0.1
3.3
313.0
2.9
4.3
49.4
5.2
0.1
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
The fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Quoted market values are used
where available; otherwise, fair values have been estimated based on
discounted expected future cash flows and other valuation techniques.
These techniques involve uncertainties and require assumptions and
judgments covering prepayments, credit risk and discount rates.
Furthermore there is a wide range of potential valuation techniques.
Changes in these assumptions would significantly affect estimated fair
values. The fair values reported would not necessarily be realised in
an immediate sale or settlement.
The assumptions and methodologies underlying the calculation of fair
values of financial instruments at the balance sheet date are as
follows:
Short-term financial instruments
For certain short-term financial instruments: cash and balances at
central banks, items in the course of collection from other banks,
settlement balances, items in the course of transmission to other
banks, customer demand deposits and notes in circulation, carrying
value is a reasonable approximation of fair value.
Loans to banks and customers
In estimating the fair value of net loans to customers and banks
measured at amortised cost, NatWest Group’s loans are segregated
into appropriate portfolios reflecting the characteristics of the
constituent loans. Two principal methods are used to estimate fair
value:
(a) Contractual cash flows are discounted using a market discount
rate that incorporates the current spread for the borrower or where
this is not observable, the spread for borrowers of a similar credit
standing. This method is used for portfolios where counterparties
have external ratings: institutional and corporate lending in
NatWest Markets.
(b) Expected cash flows (unadjusted for credit losses) are discounted
at the current offer rate for the same or similar products. The
current methodology caps all loan values at par rather than
modelling clients’ option to repay loans early. This approach is
adopted for lending portfolios in Retail Banking, Ulster Bank RoI,
Commercial Banking (SME loans) and Private Banking in order to
reflect the homogeneous nature of these portfolios.
Debt securities
The majority of debt securities are valued using quoted prices in active
markets, or using quoted prices for similar assets in active markets.
Fair values of the rest are determined using discounted cash flow
valuation techniques.
Deposits by banks and customer accounts
Fair values of deposits are estimated using discounted cash flow
valuation techniques.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted prices for similar liabilities
where available or by reference to valuation techniques, adjusting for
own credit spreads where appropriate.
NatWest Group Annual Report and Accounts 2020
298
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
13 Financial instruments - maturity analysis
Remaining maturity
The following table shows the residual maturity of financial instruments, based on contractual date of maturity.
Assets
Cash and balances at central banks*
Trading assets
Derivatives
Settlement balances
Loans to banks - amortised cost*
Loans to customers - amortised cost
Other financial assets
Liabilities
Bank deposits (1)
Customer deposits
Settlement balances
Trading liabilities
Derivatives
Other financial liabilities
Subordinated liabilities
Notes in circulation
Lease liabilities
Less than
12 months
£m
124,489
42,037
46,244
2,297
6,835
87,531
8,901
12,315
430,283
5,545
45,037
47,361
12,403
365
2,655
185
2020
More than
12 months
£m
Total
£m
Less than
12 months
£m
— 124,489
68,990
166,523
2,297
6,955
360,544
55,148
26,953
120,279
—
120
273,013
46,247
8,291
1,456
—
27,219
113,344
33,408
9,597
—
1,513
20,606
431,739
5,545
72,256
160,705
45,811
9,962
2,655
1,698
80,993
51,825
40,798
4,387
7,541
77,742
10,187
9,286
367,098
4,069
53,047
41,276
11,915
160
2,109
194
2019
More than
12 months
£m
—
24,920
109,231
—
13
249,205
51,265
11,207
2,149
—
20,902
105,603
33,305
9,819
—
1,629
Total
£m
80,993
76,745
150,029
4,387
7,554
326,947
61,452
20,493
369,247
4,069
73,949
146,879
45,220
9,979
2,109
1,823
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
Note:
(1) More than 12 months includes £5.0 billion of Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises participation which has
been repaid early in January 2021
Assets and liabilities by contractual cash flow maturity
The tables on the following page, show the contractual undiscounted
cash flows receivable and payable, up to a period of 20 years,
including future receipts and payments of interest of financial assets
and liabilities by contractual maturity. The balances in the following
tables do not agree directly with the consolidated balance sheet, as
the tables include all cash flows relating to principal and future coupon
payments, presented on an undiscounted basis. The tables have been
prepared on the following basis:
Financial assets have been reflected in the time band of the latest date
on which they could be repaid, unless earlier repayment can be
demanded by NatWest Group. Financial liabilities are included at the
earliest date on which the counterparty can require repayment,
regardless of whether or not such early repayment results in a penalty.
If the repayment of a financial instrument is triggered by, or is subject
to, specific criteria such as market price hurdles being reached, the
asset is included in the time band that contains the latest date on
which it can be repaid, regardless of early repayment.
The liability is included in the time band that contains the earliest
possible date on which the conditions could be fulfilled, without
considering the probability of the conditions being met.
For example, if a structured note is automatically prepaid when an
equity index exceeds a certain level, the cash outflow will be included
in the less than three months period, whatever the level of the index at
the year end. The settlement date of debt securities in issue, issued by
certain securitisation vehicles consolidated by NatWest Group,
depends on when cash flows are received from the securitised assets.
Where these assets are prepayable, the timing of the cash outflow
relating to securities assumes that each asset will be prepaid at the
earliest possible date. As the repayments of assets and liabilities are
linked, the repayment of assets in securitisations is shown on the
earliest date that the asset can be prepaid, as this is the basis used for
liabilities.
The principal amounts of financial assets and liabilities that are
repayable after 20 years or where the counterparty has no right to
repayment of the principal are excluded from the table, as are interest
payments after 20 years.
The maturity of guarantees and commitments is based on the earliest
possible date they would be drawn in order to evaluate NatWest
Group’s liquidity position.
MFVTPL assets of £235.9 billion (2019 - £227.3 billion) and HFT
liabilities of £232.8 billion (2019 - £220.8 billion) have been excluded
from the following tables.
NatWest Group Annual Report and Accounts 2020
299
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
13 Financial instruments – maturity analysis continued
2020
Assets by contractual maturity
Cash and balances at central banks
Derivatives held for hedging
Settlement balances
Loans to banks - amortised cost
Loans to customers - amortised cost
Other financial assets (1)
Finance lease
Liabilities by contractual maturity
Bank deposits (2)
Customer deposits
Settlement balance
Derivatives held for hedging
Other financial liabilities
Subordinated liabilities
Notes in circulation
Lease liabilities
Guarantees and commitments notional amount
Guarantees (3)
Commitments (4)
2019
Assets by contractual maturity
Cash and balances at central banks*
Derivatives held for hedging
Settlement balances
Loans to banks - amortised cost*
Loans to customers - amortised cost
Other financial assets (1)
Finance lease
Liabilities by contractual maturity
Bank deposits
Customer deposits
Settlement balances
Derivatives held for hedging
Other financial liabilities
Subordinated liabilities
Notes in circulation
Lease liabilities
Guarantees and commitments notional amount
Guarantees (3)
Commitments (4)
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
£m
£m
£m
£m
£m
£m
124,489
14
2,297
5,600
47,507
4,019
48
183,974
11,217
421,763
5,545
36
4,716
73
2,655
51
446,056
2,244
121,922
124,166
80,993
33
4,387
6,524
48,793
4,619
72
145,421
7,269
358,359
4,069
9
4,810
21
2,109
54
376,700
2,757
117,228
119,985
—
18
—
1,245
46,718
5,919
366
54,266
1,078
8,528
—
(17)
8,144
685
—
135
18,553
—
—
—
—
7
—
1,032
36,108
6,644
289
44,080
2,017
8,773
—
22
7,602
541
—
140
19,095
—
—
—
—
96
—
—
65,138
12,592
840
78,666
3,241
1,407
—
94
15,558
4,387
—
294
24,981
—
—
—
—
63
—
5
70,957
16,287
920
88,232
11,297
2,105
—
50
11,849
3,295
—
313
28,909
—
—
—
—
—
—
—
58,680
10,791
671
70,142
5,038
23
—
3
11,470
3,444
—
245
20,223
—
—
—
—
103
—
—
51,667
9,857
646
62,273
38
22
—
40
13,935
5,270
—
249
19,554
—
—
—
—
12
—
1
81,544
11,855
895
94,307
—
26
—
64
7,358
923
—
429
8,800
—
—
—
—
56
—
—
66,453
15,766
802
83,077
—
23
—
59
9,426
327
—
457
10,292
—
—
—
—
6
—
110
88,155
5,774
545
94,590
—
20
—
(2)
254
562
—
497
1,331
—
—
—
—
42
—
—
79,174
5,081
653
84,950
—
17
—
46
328
1,700
—
571
2,662
—
—
—
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
Notes:
(1) Other financial assets excludes equity shares.
(2) 3 to 5 years includes £5.0 billion of Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises participation which has been
repaid early in January 2021.
(3) NatWest Group is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. NatWest Group expects most guarantees it
provides to expire unused.
(4) NatWest Group has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to
certain conditions being met by the counterparty. NatWest Group does not expect all facilities to be drawn, and some may lapse before drawdown.
NatWest Group Annual Report and Accounts 2020
300
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
14 Loan impairment provisions
Loan exposure and impairment metrics
The table below summarises loans and related credit impairment measures within the scope of ECL framework.
Loans - amortised cost
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL provisions (1)
- Stage 1
- Stage 2
- Stage 3
Of which: individual
Of which: collective
ECL provision coverage (2,3)
- Stage 1 (%)
- Stage 2 (%)
- Stage 3 (%)
2020
£m
287,124
78,917
6,358
2,292
4,066
372,399
519
3,081
2,586
831
1,755
6,186
0.18
3.90
40.67
1.66
2019*
£m
302,367
27,868
6,598
2,051
4,547
336,833
322
752
2,718
796
1,922
3,792
0.11
2.70
41.19
1.13
Impairment losses
ECL charge (4)
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL loss rate - annualised (basis points) (3)
Amounts written off
Of which: individual
Of which: collective
*2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for
further details.
3,242
(121)
2,747
616
194
422
87
937
191
746
696
(212)
318
590
303
287
20
792
372
420
Includes £6 million (2019 - £4 million) related to assets classified as FVOCI.
Notes:
(1)
(2) ECL provisions coverage is calculated as ECL provisions divided by loans – amortised cost and FVOCI.
(3) ECL provisions coverage and ECL loss rates are calculated on third party loans and related ECL provisions and charge respectively. ECL loss rate is
(4)
calculated as annualised third party ECL charge divided by loans – amortised cost and FVOCI.
Includes a £12 million charge (2019 - £2 million) related to other financial assets, of which £2 million (2019 - £1 million release) related to assets classified as
FVOCI; and £28 million (2019 - nil) related to contingent liabilities.
(5) The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to page 180 for Financial instruments
within the scope of the IFRS 9 ECL framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and
balances at central banks totalling £122.8 billion (2019 – £79.2 billion) and debt securities of £53.8 billion (2019 – £59.4 billion).
NatWest Group Annual Report and Accounts 2020
301
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
14 Loan impairment provisions continued
Credit risk enhancement and mitigation
For information on Credit risk enhancement and mitigation held as
security, refer to Risk and capital management – Credit risk
enhancement and mitigation section.
Critical accounting policy: Loan impairment provisions
The loan impairment provisions have been established in accordance
with IFRS 9. Accounting policy 13 sets out how the expected loss
approach is applied. At 31 December 2020, customer loan impairment
provisions amounted to £6,186 million (2019 - £3,792 million). A loan
is impaired when there is objective evidence that the cash flows will
not occur in the manner expected when the loan was advanced. Such
evidence includes, changes in the credit rating of a borrower, the
failure to make payments in accordance with the loan agreement,
significant reduction in the value of any security, breach of limits or
covenants, and observable data about relevant macroeconomic
measures.
The impairment loss is the difference between the carrying value of the
loan and the present value of estimated future cash flows at the loan's
original effective interest rate.
The measurement of credit impairment under the IFRS expected loss
model depends on management’s assessment of any potential
deterioration in the creditworthiness of the borrower, its modelling of
expected performance and the application of economic forecasts. All
three elements require judgments that are potentially significant to the
estimate of impairment losses. For further information and sensitivity
analysis, refer to Risk and capital management – Measurement
uncertainty and ECL sensitivity analysis section.
IFRS 9 ECL model design principles
To meet IFRS 9 requirements, PD, LGD and EAD used in ECL
calculations must be:
Unbiased – material regulatory conservatism has been removed to
produce unbiased model estimates.
Point-in-time – recognise current economic conditions.
Forward-looking – incorporated into PD estimates and, where
appropriate, EAD and LGD estimates.
For the life of the loan – all PD, LGD and EAD models produce
term structures to allow a lifetime calculation for assets in Stage 2
and Stage 3.
IFRS 9 requires that at each reporting date, an entity shall assess
whether the credit risk on an account has increased significantly since
initial recognition. Part of this assessment requires a comparison to be
made between the current lifetime PD (i.e. the probability of default
over the remaining lifetime at the reporting date) with the equivalent
lifetime PD as determined at the date of initial recognition.
The general approach for the IFRS 9 LGD models is to leverage
corresponding Basel LGD models with bespoke adjustments to ensure
estimates are unbiased and where relevant forward-looking.
For wholesale, while conversion ratios in the historical data show
temporal variations, these cannot be sufficiently explained by the CCI
measure (unlike in the case of PD and some LGD models) and are
presumed to be driven to a larger extent by exposure management
practices. Therefore point-in-time best estimates measures for EAD
are derived by estimating the regulatory model specification on a
rolling five-year window.
Approach for multiple economic scenarios (MES)
The base scenario plays a greater part in the calculation of ECL than
the approach to MES.
15 Other financial assets
2020
Mandatory fair value through profit or loss
Fair value through other comprehensive income
Amortised cost
Total
2019
Mandatory fair value through profit or loss
Fair value through other comprehensive income
Amortised cost
Total
Central and local government
Debt securities
UK
£m
—
17,458
4,997
22,455
—
18,437
5,411
23,848
US
£m
—
11,742
235
11,977
—
13,981
242
14,223
Other
£m
—
6,802
116
6,918
—
8,786
120
8,906
Other
debt
£m
88
8,591
4,458
13,137
305
7,130
5,681
13,116
Total
£m
88
44,593
9,806
54,487
305
48,334
11,454
60,093
Equity
shares
£m
14
294
—
308
45
949
—
994
Other
loans
£m
338
15
—
353
Total
£m
440
44,902
9,806
55,148
365
715
— 49,283
— 11,454
61,452
365
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Equity shares disposed during 2020 include SABB (£383 million), VISA Inc. (£186 million), and Vocalink (£16 million).
Dividends on FVOCI equity shares include £5 million in relation to the equity holding in OTC Derivative Limited and £2 million for VISA Inc.
Dividends received in relation to equity shares disposed during the year were £15 million in relation to NWG’s equity holding in SABB.
NatWest Group Annual Report and Accounts 2020
302
Notes to the consolidated financial statements
16 Intangible assets
Cost
At 1 January
Currency translation and other adjustments
Acquisition of subsidiaries
Additions
Disposals and write-off of fully amortised assets (2)
At 31 December
Accumulated amortisation and impairment
At 1 January
Currency translation and other adjustments
Disposals and write-off of fully amortised assets
Charge for the year
Impairment of intangible assets
At 31 December
Goodwill
£m
9,980
—
—
—
(41)
9,939
4,373
—
(41)
—
—
4,332
2020
Other (1)
£m
2,293
(1)
—
348
(48)
2,592
1,278
1
(26)
282
9
1,544
Total
£m
12,273
(1)
—
348
(89)
12,531
5,651
1
(67)
282
9
5,876
Goodwill
£m
18,164
(180)
1
—
(8,005)
9,980
12,558
(180)
(8,005)
—
—
4,373
2019
Other (1)
£m
2,024
2
—
380
(113)
2,293
1,014
1
(72)
291
44
1,278
Total
£m
20,188
(178)
1
380
(8,118)
12,273
13,572
(179)
(8,077)
291
44
5,651
Net book value at 31 December
5,607
1,048
6,655
5,607
1,015
6,622
Notes:
(1) Principally internally generated software.
(2) Write-off of fully amortised Goodwill for £8 billion in 2019 that arose on the acquisition of ABN AMRO Holding N.V..
Intangible assets other than goodwill are reviewed for indicators of
impairment. In 2020 £9 million (2019 - £44 million) of previously
capitalised software was impaired primarily as a result of software
which is no longer expected to yield future economic benefit.
NatWest Group’s goodwill acquired in business combinations analysed
by reportable segment is in Note 4 Segmental analysis. It is reviewed
annually at 31 December for impairment. No impairment was indicated
at 31 December 2020 or 2019.
Impairment testing involves the comparison of the carrying value of
each cash-generating unit (CGU) with its recoverable amount. The
carrying values of the segments reflect the equity allocations made by
management which are consistent with NatWest Group’s capital
targets.
Recoverable amount is the higher of fair value less costs of disposal
and value in use. Value in use is the present value of expected future
cash flows from the CGU. Fair value is the price that would be
received to sell an asset in an orderly transaction between market
participants.
The recoverable amounts for all CGUs at 31 December 2020 were
based on value in use, using management's latest five-year revenue
and cost forecasts. These are discounted cash flow projections over
five years. The forecast is then extrapolated in perpetuity using a long-
term growth rate to compute a terminal value, which comprises the
majority of the value in use. The long-term growth rates have been
based on expected nominal growth of the CGUs. The pre-tax risk
discount rates are based on those observed to be applied to
businesses regarded as peers of the CGUs.
Critical accounting policy: Goodwill
Critical estimates
Impairment testing involves a number of judgments. The key
judgments are the five-year cash flow forecast, the long-term growth
rate used to derive the terminal value, and the discount rate. Future
value in use is primarily affected by changes in profitability, and
changes in discount rate. Adverse changes could lead to value in use
falling below carrying value. The most likely cause for this would be a
failure to meet budgets, including cost targets, or external downgrades
in the UK economy.
The recoverable amount exceeds the carrying value for each CGU at
31 December 2020. Alternative scenarios applied to consider the
recoverability of the Commercial Banking goodwill indicated that there
were possibilities of partial / full impairment for worse economic
outlooks or failure to meet income or cost forecasts. The conclusion
that Commercial Banking goodwill was recoverable reflected the
current ECL outlook and management plans for costs and revenues.
An impairment of Commercial Banking goodwill is possible if there is a
further economic deterioration or other negative effects on costs and
revenues.
The impact of reasonably possible changes to the more significant
variables in the value in use calculations are presented below. This
reflects the sensitivity of the VIU to each key assumption on its own. It
is possible that more than one change may occur at the same time.
31 December 2020
Retail Banking
Commercial Banking
RBS International
31 December 2019
Retail Banking
Commercial Banking
RBS International
Terminal
Goodwill growth rate
%
1.6
1.6
1.6
£bn
2.7
2.6
0.3
Assumptions
Pre-tax
discount
rate
%
13.7
13.7
12.1
Recoverable
amount
exceeded
carrying value
£bn
5.9
1.5
1.1
Consequential impact of
1% adverse
movement
Consequential impact of
5% adverse
movement
Discount
Terminal
rate growth rate
£bn
£bn
(0.8)
(1.8)
(0.5)
(1.5)
(0.2)
(0.4)
Forecast
Income
£bn
(2.0)
(1.8)
(0.3)
Forecast
cost
£bn
(0.9)
(0.9)
(0.1)
Cost:
income
ratio (1)
%
48.3
53.7
42.7
2.7
2.6
0.3
1.6
1.6
1.6
13.3
13.4
12.0
47.9
53.8
37.5
8.7
4.1
2.1
(2.2)
(1.8)
(0.5)
(1.0)
(0.7)
(0.3)
(2.1)
(2.1)
(0.4)
(0.9)
(1.1)
(0.1)
Note:
(1) Average Cost:income ratio % over the 5-year forecast period.
NatWest Group Annual Report and Accounts 2020
303
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
16 Intangible assets continued
The following table gives the percentage change in key assumptions that would reduce the headroom of CGUs to nil.
Change in key assumptions to reduce headroom to nil (%)
Retail Banking
Commercial Banking
RBS International
2020
Terminal
growth rate
%
(25.4)
(4.0)
(10.8)
Pre-tax
discount
rate
%
6.2
1.3
4.4
Forecast
income
%
(14.6)
(4.1)
(18.6)
Forecast
cost
%
33.9
8.2
52.8
Terminal
growth rate
%
(83.0)
(16.4)
(44.2)
2019
Pre-tax
discount
rate
%
8.5
3.5
8.2
Forecast
income
%
(20.4)
(9.8)
(28.1)
Forecast
cost
%
48.0
19.4
85.6
17 Other assets
Interests in associates (1)
Property, plant and equipment
Pension schemes in net surplus (Note 5)
Prepayments
Accrued income
Tax recoverable
Deferred tax (Note 7)
Acceptances
Other
Other assets
Note:
(1)
Includes interest in Business Growth Fund £442 million (2019 - £424 million).
18 Other financial liabilities
Customer deposits - designated as at fair value through profit or loss
Debt securities in issue
- designated as at fair value through profit or loss
- amortised cost
Total
2020
£m
449
4,418
723
328
216
192
901
272
391
7,890
2019
£m
436
4,928
614
380
275
46
1,011
268
352
8,310
2020
£m
796
1,607
43,408
45,811
2019
£m
—
2,258
42,962
45,220
NatWest Group Annual Report and Accounts 2020
304
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
19 Subordinated liabilities
Dated loan capital
Undated loan capital
Preference shares
2020
£m
8,530
1,287
145
9,962
2019
£m
7,775
2,058
146
9,979
Certain preference shares issued by the company are classified as liabilities; these securities remain subject to the capital maintenance rules of
the Companies Act 2006.
New issue
NatWest Group plc
US$750 million 3.754% dated notes 2029
£1,000 million 3.622% dated notes 2030 (callable between May 2025 to August 2025)
US$850 million 3.032% dated notes 2035 (callable November 2030)
Redemptions
NatWest Group plc
€1,000 million 3.63% dated notes 2024 (callable March 2019)
US$2,250 million 6.13% dated notes 2022 (partial redemption)
US$1,000 million 6.10% dated notes 2023 (partial redemption)
US$2,000 million 7.5% dated notes 2020
US$762 million 7.648% undated notes (partial redemption)
NatWest Markets Plc
£35 million 5.5% fixed rate undated subordinated notes (callable December 2019)
US$125.6 million floating rate notes 2020
NatWest Bank Plc
SEK 90 million floating rate notes 2019
NWM N.V. and subsidiaries
US$16 million floating rate notes 2019
US$71.8 million floating rate notes 2019
€250 million 4.70% notes 2019
US$650 million 6.425% undated notes 2043 (partial redemption)
€15 million 6.00% notes 2020
Capital
treatment
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
Ineligible
Tier 2
Tier 2
Tier 1
Tier 2
Tier 2
Tier 2
Ineligible
Tier 2
2020
£m
—
996
634
1,630
—
499
358
1,528
497
2,882
—
97
97
—
—
—
—
—
187
11
198
2019
£m
577
—
—
577
855
—
—
—
—
855
35
—
35
8
8
10
56
145
—
—
211
NatWest Group Annual Report and Accounts 2020
305
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
20 Other liabilities
Lease liabilities (Note 22)
Provisions for liabilities and charges
Retirement benefit liabilities (Note 5)
Accruals
Deferred income
Current tax
Deferred tax (Note 7)
Acceptances
Other liabilities
Provisions for liabilities and charges
At 1 January
Expected credit losses impairment charge
Currency translation and other movements
Charge to income statement
Releases to income statement
Provisions utilised
At 31 December
2020
£m
1,698
1,852
121
990
361
63
291
272
740
6,388
2019
£m
1,823
2,677
119
1,125
362
132
266
233
801
7,538
Payment
protection
insurance (1)
£m
1,156
—
—
1
(277)
(557)
323
Other
customer
redress
£m
314
—
5
352
(55)
(190)
426
Litigation
and other
regulatory
£m
426
—
1
120
(67)
(115)
365
Other (2)
£m
781
83
(2)
400
(178)
(346)
738
Total
£m
2,677
83
4
873
(577)
(1,208)
1,852
Notes:
(1) The balance at 31 December 2020 includes provisions held in relation to offers made in 2019 and earlier years of £110 million.
(2) Materially comprises provisions relating to property closures and restructuring costs.
Critical accounting policy: Provisions for liabilities
The key judgement is involved in determining whether a present obligation exists. There is often a high degree of uncertainty and judgement is
based on the specific facts and circumstances relating to individual events in determining whether there is a present obligation. Judgement is
also involved in estimation of the probability, timing and amount of any outflows. Where NatWest Group can look to another party such as an
insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is recognised when, and only when, it is virtually
certain that it will be received.
Estimates - Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result of a past
event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the final outcome and the
amounts provided will affect the reported results in the period when the matter is resolved.
PPI: The provision reflects the estimated cost of PPI redress attributable to claims prior to the Financial Conduct Authority (FCA) complaint
deadline of 29 August 2019. All pre-deadline complaints have been processed which removes complaint volume estimation uncertainty from
the provision estimate. NatWest Group continues to conclude remaining bank-identified closure work and conclude cases with the Financial
Ombudsmen Service.
Other customer redress: Provisions reflect the estimated cost of redress attributable to claims where it is determined that a present
obligation exists.
Litigation and other regulatory: NatWest Group is engaged in various legal proceedings, both in the UK and in overseas jurisdictions,
including the US. For further information in relation to legal proceedings and discussion of the associated uncertainties, refer to Note 26.
Other provisions: These materially comprise provisions for onerous contracts and restructuring costs. Onerous contract provisions comprise
an estimate of the costs involved with fulfilling the terms and conditions of contracts net of any expected benefits to be received. This
includes provision for contractual costs such as rates associated with vacant properties. Redundancy and restructuring provisions comprise
the estimated cost of restructuring, including redundancy costs where an obligation exists.
Background information for all material provisions is given in Note 26.
NatWest Group Annual Report and Accounts 2020
306
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
21 Share capital and other equity
Allotted, called up and fully paid
Ordinary shares of £1
Non-cumulative preference shares of US$0.01 (1)
Cumulative preference shares of £1
Note:
(1) No shares were redeemed in 2020 or 2019.
Movement in allotted, called up and fully paid ordinary shares
At 1 January 2019
Shares issued
At 1 January 2020
Shares issued
At 31 December 2020
2020
£m
12,129
—
1
2019
£m
12,094
—
1
Number of shares
2020
000s
12,129,165
10
900
2019
000s
12,093,909
10
900
£m
12,049
45
12,094
35
12,129
Number of
shares - 000s
12,048,605
45,304
12,093,909
35,256
12,129,165
The company has announced that the directors have recommended a
final dividend of £364 million, or 3p per ordinary share (2019 – nil)
subject to shareholder approval at the Annual General Meeting on 28
April 2021.
If approved, payment will be made on 4 May 2021 to shareholders on
the register at the close of business on 26 March 2021. The ex-
dividend date will be 25 March 2021.
Non-cumulative preference shares
Non-cumulative preference shares entitle their holders to periodic non-
cumulative cash dividends at specified fixed rates for each series
payable out of distributable profits of the company.
The company may redeem some or all of the non-cumulative
preference shares from time to time at the rates detailed in the table
on the next page plus dividends otherwise payable for the then current
dividend period to the date of redemption.
Ordinary shares
There is no authorised share capital under the company’s constitution.
At 31 December 2020, the directors had authority granted at the 2020
Annual General Meeting to issue up to £604,695,460 million nominal
of ordinary shares other than by pre-emption to existing shareholders.
On 6 February 2019 the company held a General Meeting and
shareholders approved a special resolution to give the company
authority to make off-market purchases of its ordinary shares from HM
Treasury (or its nominee) at such times as the directors may determine
is appropriate. Full details of the proposal are set out in the Circular
and Notice of General Meeting. This authority was renewed at the
Annual General Meeting in 2020 and shareholders will be asked to
renew this authorisation at the Annual General Meeting in 2021.
In the three years to 31 December 2020, the percentage increase in
issued share capital due to non pre-emptive issuance (excluding
employee share schemes) for cash was 0.43%. In addition, the
company issued 35 million ordinary shares of £1 each in connection
with employee share plans.
In 2019 NatWest Group paid an interim dividend of £241 million, or
2.0p per ordinary share (2018 - £241 million, or 2.0p per ordinary
share) and a special dividend of £1,449 million, or 12.0p per ordinary
share (2018 – nil). In addition, the company had announced that the
directors had recommended a final dividend of £364 million, or 3.0p
per ordinary share (2018 – £422 million, or 3.5p per ordinary share),
and a further special dividend of £606 million, or 5.0p per ordinary
share (2018 £904 million, or 7.5p per ordinary share), both of which
were subject to shareholders’ approval at the Annual General Meeting
on 29 April 2020.
In response to a formal request from the Prudential Regulatory
Authority, the Board cancelled the final and special ordinary dividend
payments in relation to the 2019 financial year and did not submit them
for approval at the AGM held on 29 April 2020.
NatWest Group Annual Report and Accounts 2020
307
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
21 Share capital and other equity continued
Non-cumulative preference shares classified as equity
Shares of US$0.01 - Series U
Note:
(1) Preference shares where distributions are discretionary are classified as equity.
Number of shares
in issue
10,130
Interest rate
floating
Redemption
date on or after
Redemption
price per share
29 September 2017 US$100,000
Capital recognised for regulatory purposes cannot be redeemed
without Prudential Regulation Authority consent. This includes ordinary
shares, preference shares and additional Tier 1 Instruments.
Merger reserve - the merger reserve comprises the premium on
shares issued to acquire NatWest Bank Plc, less goodwill amortisation
charged under previous GAAP.
Capital redemption reserve - under UK companies legislation, when
shares are redeemed or purchased wholly or partly out of the
company's profits, the amount by which the company's issued share
capital is diminished must be transferred to the capital redemption
reserve. The capital maintenance provisions of UK companies
legislation apply to the capital redemption reserve as if it were part of
the company’s paid up share capital. On 15 June 2017, the Court of
Session approved a reduction of NatWest plc capital so that the
amounts which stood to the credit of the capital redemption reserve
were transferred to retained earnings.
Own shares held - at 31 December 2020, 16 million ordinary shares of
£1 each of the company (2019 - 15 million) were held by employee
share trusts in respect of share awards and options granted to
employees. During the year, the employee share trusts purchased 42
million ordinary shares and delivered 41 million ordinary shares in
satisfaction of the exercise of options and the vesting of share awards
under the employee share plans. The company retains the flexibility to
use newly issued shares, shares purchased by the NatWest Group
Employee Share Ownership Trust and any available treasury shares to
satisfy obligations under its employee share plans.
NatWest Group plc optimises capital efficiency by maintaining
reserves in subsidiaries, including regulated entities. Certain
preference shares and subordinated debt are also included within
regulatory capital. The remittance of reserves to the company or the
redemption of shares or subordinated capital by regulated entities may
be subject to maintaining the capital resources required by the relevant
regulator.
UK law prescribes that only the reserves of the company are taken into
account for the purpose of making distributions and in determining
permissible applications of the share premium account.
On a winding-up or liquidation of the company, the holders of the non-
cumulative preference shares are entitled to receive, out of any
surplus assets available for distribution to the company's shareholders
(after payment of arrears of dividends on the cumulative preference
shares up to the date of repayment) pari passu with the cumulative
preference shares and all other shares of the company ranking pari
passu with the non-cumulative preference shares as regards
participation in the surplus assets of the company, a liquidation
distribution per share equal to the applicable redemption price detailed
in the table above, together with an amount equal to dividends for the
then current dividend period accrued to the date of payment, before
any distribution or payment may be made to holders of the ordinary
shares as regards participation in the surplus assets of the company.
Except as described above, the holders of the non-cumulative
preference shares have no right to participate in the surplus assets of
the company.
Holders of the non-cumulative preference shares are not entitled to
receive notice of or attend general meetings of the company except if
any resolution is proposed for adoption by the shareholders of the
company to vary or abrogate any of the rights attaching to the non-
cumulative preference shares or proposing the winding-up or
liquidation of the company. In any such case, they are entitled to
receive notice of and to attend the general meeting of shareholders at
which such resolution is to be proposed and are entitled to speak and
vote on such resolution (but not on any other resolution). In addition, in
the event that, prior to any general meeting of shareholders, the
company has failed to pay in full the most recent dividend payment
due on the series U non-cumulative dollar preference shares, the
holders shall be entitled to receive notice of, attend, speak and vote at
such meeting on all matters together with the holders of the ordinary
shares. In these circumstances only, the rights of the holders of the
non-cumulative preference shares so to vote shall continue until the
company shall have resumed the payment in full of the dividends in
arrears.
Paid-in equity - comprises equity instruments issued by the company
other than those legally constituted as shares.
Additional Tier 1 Instruments issued by NatWest Group plc having the
legal form of debt are classified as equity under IFRS. The coupons on
these Instruments are non-cumulative and payable at the company’s
discretion. In the event NatWest Group’s CET1 ratio falls below 7%
any outstanding Instruments will be converted into ordinary shares at a
fixed price.
Additional Tier 1 notes
US$2.0 billion 7.5% notes callable August 2020 (1)
US$1.15 billion 8% notes callable August 2025 (1)
US$2.65 billion 8.625% notes callable August 2021 (2)
US$1.5 billion 6.000% notes callable
December 2025 - June 2026 (3)
GBP£1.0 billion 5.125% notes callable
May - November 2027 (4)
2020
£m
2019
£m
2018
£m
—
734
2,047
1,277
734
2,047
1,277
734
2,047
1,220
998
—
—
—
—
4,999
4,058
4,058
Notes:
(1) Issued in August 2015. In the event of conversion, converted into ordinary
shares at a price of $3.606 nominal per £1 share.
(2) Issued in August 2016. In the event of conversion, converted into ordinary
shares at a price of $2.284 nominal per £1 share.
(3) Issued in June 2020. In the event of conversion, converted into ordinary
shares at a price of £1.754 (translated at applicable exchange rate) per £1
share.
(4) Issued in November 2020. In the event of conversion, converted into
ordinary shares at a price of £1.754 nominal per £1 share.
NatWest Group Annual Report and Accounts 2020
308
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
22 Leases
Lessee
NatWest Group is party to lease contracts as lessee to support its operations. The following table provides information in respect of those lease
contracts as lessee.
Amounts recognised in consolidated income statement
Interest payable
Depreciation (1)
Rental expense on short term leases
Income from subleasing right of use assets
Amounts recognised on balance sheet
Right of use assets included in property, plant and equipment (2)
Additions to right of use assets
Lease liabilities (3)
2020
£m
(42)
(209)
(1)
4
2020
£m
2019
£m
(44)
(224)
(4)
9
2019
£m
955
80
(1,698)
1,162
135
(1,823)
The total cash outflow for leases is £220 million (2019: £222 million), including payment of principal amount of £179 million (2019: £181 million)
which are included in the operating activities in cash flow statement.
Notes:
(1)
(2)
(3) Contractual cashflows of lease liabilities is shown in Note 13.
Includes impairment of right of use assets of £89 million (2019: £86 million).
Includes right of use asset for plant and equipment of £8 million (2019: £23 million) and depreciation of £2 million (2019: £5 million).
Lessor
Acting as a lessor, NatWest Group provides asset finance to its customers. It purchases plant, equipment and intellectual property, renting them
to customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases.
2020
£m
2019
£m
289
314
168
(145)
23
2020
£m
3,231
2,288
1,638
959
509
1,735
10,360
(232)
(22)
(1,081)
9,025
(196)
8,829
165
(138)
27
2019
£m
3,388
2,229
1,733
758
682
1,758
10,548
(215)
(30)
(1,196)
9,107
(110)
8,997
Amounts included in consolidated income statement
Finance leases
Finance income on the net investment in leases
Operating leases
Gross Lease income
Depreciation
Net lease income
Amount receivable under finance leases
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
After 5 years
Lease payments total
Unguaranteed residual values
Future drawdowns
Unearned income
Present value of lease payments
Impairments
Net investment in finance leases
NatWest Group Annual Report and Accounts 2020
309
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
22 Leases continued
The following tables show undiscounted lease receivables from operating leases:
Amounts receivable under operating leases
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
After 5 years
Total
Nature of operating lease assets on the balance sheet
Transportation
Cars and light commercial vehicles
Other
2020
£m
143
112
79
34
14
11
393
2020
£m
327
28
245
600
2019
£m
154
123
83
48
17
12
437
2019
£m
334
24
295
653
Investment properties are leased out on operating lease for £840 million (2019: £949 million) and had lease income for £60 million (2019: £76
million). The following table shows undiscounted lease receivables from Investment properties:
Amounts receivable under investment properties
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
After 5 years
Total
2020
£m
67
127
54
76
88
142
554
2019
£m
113
156
128
55
98
179
729
NatWest Group Annual Report and Accounts 2020
310
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
Covered debt programme
Group companies have assigned loans to customers and debt
investments to bankruptcy remote limited liability partnerships to
provide security for issues of debt securities. NatWest Group retains
all of the risks and rewards of these assets and continues to recognise
them. The partnerships are consolidated by NatWest Group and the
related covered bonds included within other financial liabilities. At 31
December 2020, £10,758 million (2019 - £9,630 million) of loans to
customers and £318 million (2019 - £280 million) of debt investments
provided security for debt securities in issue and other borrowing of
£4,105 million (2019 - £7,241 million).
Lending of own issued securities
NatWest Group has issued, retained, and lent debt securities under
securities lending arrangements. Under standard terms in the UK and
US markets, the recipient has an unrestricted right to sell or repledge
collateral, subject to returning equivalent securities on maturity of the
transaction. NatWest Group retains all of the risks and rewards of own
issued liabilities lent under such arrangements and does not recognise
them. At 31 December 2020, £1,893 million secured and nil unsecured
(2019 - £1,704 million secured, £424 million unsecured) of own issued
liabilities have been retained and lent under securities lending
arrangements. At 31 December 2020, £2,029 million (2019 - £1,745
million) of loans and other debt instruments provided security for
secured own issued liabilities that have been retained and lent under
securities lending arrangements.
23 Structured entities
A structured entity (SE) is an entity that has been designed such that
voting or similar rights are not the dominant factor in deciding who
controls the entity, for example, when any voting rights relate to
administrative tasks only and the relevant activities are directed by
means of contractual arrangements. SEs are usually established for a
specific, limited purpose. They do not carry out a business or trade
and typically have no employees. They take a variety of legal forms -
trusts, partnerships and companies - and fulfil many different functions.
As well as being a key element of securitisations, SEs are also used in
fund management activities in order to segregate custodial duties from
the provision of fund management advice.
Consolidated structured entities
Securitisations
In a securitisation, assets, or interests in a pool of assets, are
transferred generally to an SE which then issues liabilities to third party
investors. The majority of securitisations are supported through
liquidity facilities or other credit enhancements. NatWest Group
arranges securitisations to facilitate client transactions and undertakes
own asset securitisations to sell or to fund portfolios of financial assets.
NatWest Group also acts as an underwriter and depositor in
securitisation transactions in both client and proprietary transactions.
NatWest Group involvement in client securitisations takes a number of
forms. It may: sponsor or administer a securitisation programme;
provide liquidity facilities or programme-wide credit enhancement; and
purchase securities issued by the vehicle.
Other credit risk transfer securitisations
NatWest Group also transfers credit risk on originated loans and
mortgages without the transfer of assets to an SE. As part of this,
NatWest Group enters into credit derivative and financial guarantee
contracts with consolidated SEs. At 31 December 2020, debt
securities in issue by such SEs (and held by third parties) were £772
million (2019 - £673 million). The associated loans and mortgages at
31 December 2020 were £10,027 million (2019 - £9,001 million). At 31
December, ECL in relation to non-defaulted assets was reduced by
£183 million (2019 - £29 million) as a result of financial guarantee
contracts with consolidated SEs.
Asset backed
securitisation
vehicles
£m
2019
Investment
funds
and other
£m
Total
£m
812
220
(158)
874
2,180
5,480
7,660
1,916
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
52
24
(4)
72
636
107
743
297
1,112
10,450
760
196
(154)
802
1,544
5,373
6,917
1,619
9,338
Unconsolidated structured entities
NatWest Group’s interest in unconsolidated structured entities is analysed below.
Trading assets and derivatives
Trading assets
Derivative assets
Derivative liabilities
Total
Non trading assets
Loans to customers
Other financial assets
Total
Liquidity facilities/loan commitments
Maximum exposure
Asset backed
securitisation
vehicles
£m
2020
Investment
funds
and other
£m
319
441
(319)
441
1,400
3,892
5,292
1,482
7,215
46
16
(21)
41
497
170
667
204
912
Total
£m
365
457
(340)
482
1,897
4,062
5,959
1,686
8,127
NatWest Group Annual Report and Accounts 2020
311
Notes to the consolidated financial statements
24 Asset transfers
Transfers that do not qualify for derecognition
NatWest Group enters into securities repurchase, lending and total
return transactions in accordance with normal market practice which
includes the provision of additional collateral if necessary. Under
standard terms in the UK and US markets, the recipient has an
unrestricted right to sell or repledge collateral, subject to returning
equivalent securities on settlement of the transaction.
Securities sold under repurchase transactions and transactions with
the substance of securities repurchase agreements are not
derecognised if NatWest Group retains substantially all the risks and
rewards of ownership. The fair value (and carrying value) of securities
transferred under such transactions included on the balance sheet, are
set out below. All of these securities could be sold or repledged by the
holder.
The following assets have failed derecognition (1)
Trading assets
Loans to banks - amortised cost
Loans to customers - amortised cost
Other financial assets
Note:
(1) Associated liabilities were £31,932 million (2019 – £27,342 million).
Assets pledged as collateral
NatWest Group pledges collateral with its counterparties in respect of derivative liabilities and bank and stock borrowings.
Assets pledged against liabilities
Trading assets
Loans to banks - amortised cost
Loans to customers - amortised cost
Other financial assets (1)
Note:
(1)
Includes assets pledged for pension derivatives and stock borrowings.
2020
£m
20,526
5
39
11,542
32,112
2020
£m
28,728
49
15,939
4,966
49,682
2019
£m
23,247
—
—
4,269
27,516
2019
£m
27,918
39
17,920
4,688
50,565
Own asset securitisations
In own-asset securitisations, the pool of assets held by the SE is either originated by NatWest Group, or (in the case of whole loan programmes)
purchased from third parties.
The table below analyses the asset categories for those own-asset securitisations where the transferred assets continue to be recorded on
NatWest Group’s balance sheet.
Asset type
Mortgages - RoI
Cash deposits
2020
Debt securities in issue
Held by
third
Held by
NatWest
parties
Group (1)
£m
243
£m
1,848
Total
£m
2,091
2019
Debt securities in issue
Held by
third
Held by
NatWest
parties
Group (1)
£m
468
—
£m
1,917
—
Total
£m
2,385
—
Assets
£m
2,221
156
2,377
Assets
£m
1,921
146
2,067
Note:
(1) Debt securities retained by NatWest Group may be pledged with central banks.
NatWest Group Annual Report and Accounts 2020
312
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
25 Capital resources
The minimum requirement for own funds is set out under the Capital Requirements Regulation on a legal entity and consolidated basis.
Transitional arrangements on the phasing in of end-point capital resources are set by the relevant regulatory authority.
The capital resources under the PRA transitional basis for NatWest Group are set out below.
Shareholders’ equity (excluding non-controlling interests)
Shareholders’ equity
Preference shares - equity
Other equity instruments
Regulatory adjustments and deductions
Own credit
Defined benefit pension fund adjustment
Cash flow hedging reserve
Deferred tax assets
Prudential valuation adjustments
Goodwill and other intangible assets
Expected losses less impairments
Foreseeable ordinary and special dividends
Foreseeable charges
Adjustment under IFRS 9 transitional arrangements
Other regulatory adjustments
CET1 capital
Additional Tier 1 (AT1) capital
Qualifying instruments and related share premium
Qualifying instruments and related share premium subject to phase out
Qualifying instruments issued by subsidiaries and held by third parties subject to phase out
AT1 capital
Tier 1 capital
Qualifying Tier 2 capital
Qualifying instruments and related share premium
Qualifying instruments issued by subsidiaries and held by third parties
Other regulatory adjustments
Tier 2 capital
Total regulatory capital
PRA transitional basis
2020
£m
43,860
(494)
(4,999)
38,367
(1)
(579)
(229)
(760)
(286)
(6,182)
—
(364)
(266)
1,747
—
(6,920)
31,447
4,983
690
140
5,813
37,260
4,882
1,191
400
6,473
43,733
2019
£m
43,547
(496)
(4,058)
38,993
(118)
(474)
(35)
(757)
(431)
(6,622)
(167)
(968)
(365)
(2)
(9,939)
29,054
4,051
1,366
140
5,557
34,611
4,867
1,345
—
6,212
40,823
It is NatWest Group policy to maintain a strong capital base, to expand
it as appropriate and to utilise it efficiently throughout its activities to
optimise the return to shareholders while maintaining a prudent
relationship between the capital base and the underlying risks of the
business. In carrying out this policy, NatWest Group has regard to the
supervisory requirements of the PRA. The PRA uses capital ratios as
a measure of capital adequacy in the UK banking sector, comparing a
bank's capital resources with its risk-weighted assets (the assets and
off-balance sheet exposures are ‘weighted’ to reflect the inherent
credit and other risks); by international agreement, the Pillar 1 capital
ratios should be not less than 8% with a Common Equity Tier 1
component of not less than 4.5%. NatWest Group has complied with
the PRA’s capital requirements throughout the year.
A number of subsidiaries and sub-groups within NatWest Group,
principally banking entities, are subject to various individual regulatory
capital requirements in the UK and overseas. Furthermore, the
payment of dividends by subsidiaries and the ability of members of
NatWest Group to lend money to other members of NatWest Group
may be subject to restrictions such as local regulatory or legal
requirements, the availability of reserves and financial and operating
performance.
NatWest Group Annual Report and Accounts 2020
313
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
26 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December 2020.
Although NatWest Group is exposed to credit risk in the event of a customer’s failure to meet its obligations, the amounts shown do not, and are
not intended to, provide any indication of NatWest Group's expectation of future losses.
Guarantees
Other contingent liabilities
Standby facilities, credit lines and other commitments
Contingent liabilities and commitments
Less than
1 year
£m
1,044
1,219
62,794
65,057
More than
1 year but
less than
3 years
£m
308
491
27,476
28,275
More than
3 years but
less than
5 years
£m
159
42
26,483
26,684
Over
5 years
£m
733
569
7,414
8,716
2020
£m
2,244
2,321
124,167
128,732
2019
£m
2,757
2,478
119,760
124,995
Note:
(1) The maturity of contingent liabilities and commitment is based on the expiry of the agreement between NatWest Group and the customer.
Banking commitments and contingent obligations, which have been
entered into on behalf of customers and for which there are
corresponding obligations from customers, are not included in assets
and liabilities. NatWest Group's maximum exposure to credit loss, in
the event of its obligation crystallising and all counterclaims, collateral
or security proving valueless, is represented by the contractual
nominal amount of these instruments included in the table above.
These commitments and contingent obligations are subject to NatWest
Group's normal credit approval processes.
Guarantees – NatWest Group gives guarantees on behalf of
customers. A financial guarantee represents an irrevocable
undertaking that NatWest Group will meet a customer's specified
obligations to third party if the customer fails to do so. The maximum
amount that NatWest Group could be required to pay under a
guarantee is its principal amount as disclosed in the table above.
NatWest Group expects most guarantees it provides to expire unused.
Other contingent liabilities - these include standby letters of credit,
supporting customer debt issues and contingent liabilities relating to
customer trading activities such as those arising from performance and
customs bonds, warranties and indemnities.
Standby facilities and credit lines - under a loan commitment, NatWest
Group agrees to make funds available to a customer in the future.
Loan commitments, which are usually for a specified term, may be
unconditionally cancellable or may persist, provided all conditions in
the loan facility are satisfied or waived. Commitments to lend include
commercial standby facilities and credit lines, liquidity facilities to
commercial paper conduits and unutilised overdraft facilities.
Other commitments - these include documentary credits, which are
commercial letters of credit providing for payment by NatWest Group
to a named beneficiary against presentation of specified documents,
forward asset purchases, forward deposits placed and undrawn note
issuance and revolving underwriting facilities, and other short-term
trade related transactions.
Contractual obligations for future expenditure not provided for in the accounts
The following table shows contractual obligations for future expenditure not provided for in the accounts at the year end.
Capital expenditure on property, plant and equipment
Contracts to purchase goods or services (1)
Note:
(1) Of which due within 1 year: £267 million (2019 – £285 million).
2020
£m
15
729
744
2019
£m
20
614
634
NatWest Group Annual Report and Accounts 2020
314
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
26 Memorandum items continued
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, NatWest Group may
hold or place assets on behalf of individuals, trusts, companies,
pension schemes and others. The assets and their income are not
included in NatWest Group's financial statements. NatWest Group
earned fee income of £245 million (2019 - £250 million; 2018 - £257
million) from these activities.
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS), the UK's
statutory fund of last resort for customers of authorised financial
services firms, pays compensation if a firm is unable to meet its
obligations. The FSCS funds compensation for customers by raising
management expenses levies and compensation levies on the
industry. In relation to protected deposits, each deposit-taking
institution contributes towards these levies in proportion to their share
of total protected deposits on 31 December of the year preceding the
scheme year (which runs from 1 April to 31 March), subject to annual
maxima set by the Prudential Regulation Authority. In addition, the
FSCS has the power to raise levies on a firm that has ceased to
participate in the scheme and is in the process of ceasing to be
authorised for the costs that it would have been liable to pay had the
FSCS made a levy in the financial year it ceased to be a participant in
the scheme.
Litigation and regulatory matters
NatWest Group plc and certain members of NatWest Group are party
to legal proceedings and involved in regulatory matters, including as
the subject of investigations and other regulatory and governmental
action (‘Matters’) in the United Kingdom (UK), the United States (US),
the European Union (EU) and other jurisdictions.
NatWest Group recognises a provision for a liability in relation to these
Matters when it is probable that an outflow of economic benefits will be
required to settle an obligation resulting from past events, and a
reliable estimate can be made of the amount of the obligation.
In many of these Matters, it is not possible to determine whether any
loss is probable, or to estimate reliably the amount of any loss, either
as a direct consequence of the relevant proceedings and regulatory
matters or as a result of adverse impacts or restrictions on NatWest
Group’s reputation, businesses and operations. Numerous legal and
factual issues may need to be resolved, including through potentially
lengthy discovery and document production exercises and
determination of important factual matters, and by addressing novel or
unsettled legal questions relevant to the proceedings in question,
before a liability can reasonably be estimated for any claim. NatWest
Group cannot predict if, how, or when such claims will be resolved or
what the eventual settlement, damages, fine, penalty or other relief, if
any, may be, particularly for claims that are at an early stage in their
development or where claimants seek substantial or indeterminate
damages.
There are situations where NatWest Group may pursue an approach
that in some instances leads to a settlement agreement. This may
occur in order to avoid the expense, management distraction or
reputational implications of continuing to contest liability, or in order to
take account of the risks inherent in defending claims or regulatory
matters, even for those Matters for which NatWest Group believes it
has credible defences and should prevail on the merits. The
uncertainties inherent in all such Matters affect the amount and timing
of any potential outflows for both Matters with respect to which
provisions have been established and other contingent liabilities.
For a discussion of certain risks associated with NatWest Group’s
litigation and regulatory matters (including investigations and customer
redress programmes), see the Risk Factor relating to legal, regulatory
and governmental actions and investigations set out on page 360.
Litigation
Residential mortgage-backed securities (RMBS) litigation in the US
NatWest Group companies continue to defend RMBS-related claims in
the US in which plaintiffs allege that certain disclosures made in
connection with the relevant offerings of RMBS contained materially
false or misleading statements and/or omissions regarding the
underwriting standards pursuant to which the mortgage loans
underlying the RMBS were issued. The remaining RMBS lawsuits
against NatWest Group companies consist of cases filed by the
Federal Deposit Insurance Corporation and the State of New Mexico
that together involve the issuance of less than US$400 million of
RMBS issued primarily from 2005 to 2007. In addition, NWMSI
previously agreed to settle a purported RMBS class action entitled
New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al.
for US$55.3 million. This was paid into escrow pending court approval
of the settlement, which was granted in March 2019, but which is now
the subject of an appeal by a class member who does not want to
participate in the settlement.
London Interbank Offered Rate (LIBOR) and other rates litigation
NWM Plc and certain other members of NatWest Group, including
NatWest Group plc, are defendants in a number of class actions and
individual claims pending in the United States District Court for the
Southern District of New York (SDNY) with respect to the setting of
LIBOR and certain other benchmark interest rates. The complaints
allege that certain members of NatWest Group and other panel banks
violated various federal laws, including the US commodities and
antitrust laws, and state statutory and common law, as well as
contracts, by manipulating LIBOR and prices of LIBOR-based
derivatives in various markets through various means.
Several class actions relating to USD LIBOR, as well as more than two
dozen non-class actions concerning USD LIBOR, are part of a co-
ordinated proceeding in the SDNY. In December 2016, the SDNY held
that it lacks personal jurisdiction over NWM Plc with respect to certain
claims. As a result of that and other decisions, all NatWest Group
companies have been dismissed from each of the USD LIBOR-related
class actions (including class actions on behalf of over-the-counter
plaintiffs, exchange-based purchaser plaintiffs, bondholder plaintiffs,
and lender plaintiffs), but seven non-class cases in the co-ordinated
proceeding remain pending against NatWest Group defendants. The
dismissal of NatWest Group companies for lack of personal jurisdiction
is the subject of a pending appeal to the United States Court of
Appeals for the Second Circuit. In March 2020, NatWest Group
companies finalised a settlement resolving the class action on behalf
of bondholder plaintiffs (those who held bonds issued by non-
defendants on which interest was paid from 2007 to 2010 at a rate
expressly tied to USD LIBOR). The amount of the settlement (which
was covered by an existing provision) has been paid into escrow
pending court approval of the settlement.
Among the non-class claims dismissed by the SDNY in December
2016 were claims that the Federal Deposit Insurance Corporation
(FDIC) had asserted on behalf of certain failed US banks. In July 2017,
the FDIC, on behalf of 39 failed US banks, commenced substantially
similar claims against NatWest Group companies and others in the
High Court of Justice of England and Wales. The action alleges that
the defendants breached English and European competition law, as
well as asserting common law claims of fraud under US law.
The future outflow of resources in respect of any Matter may ultimately
prove to be substantially greater than or less than the aggregate
provision that NatWest Group has recognised. Where (and as far as)
liability cannot be reasonably estimated, no provision has been
recognised. NatWest Group expects that in future periods, additional
provisions, settlement amounts and customer redress payments will
be necessary, in amounts that are expected to be substantial in some
instances.
In addition, there are two class actions relating to JPY LIBOR and
Euroyen TIBOR. The first class action, which relates to Euroyen
TIBOR futures contracts, was dismissed by the SDNY in September
2020 on legal grounds, and the plaintiffs have commenced an appeal
to the United States Court of Appeals for the Second Circuit. The
second class action, which relates to other derivatives allegedly tied to
JPY LIBOR and Euroyen TIBOR, is the subject of a motion to dismiss
that remains pending in the SDNY.
NatWest Group Annual Report and Accounts 2020
315
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
26 Memorandum items continued
Litigation and regulatory matters
In addition to the above, five other class action complaints were filed
against NatWest Group companies in the SDNY, each relating to a
different reference rate. The SDNY dismissed all claims against NWM
Plc in the case relating to Euribor for lack of personal jurisdiction in
February 2017. The SDNY dismissed, for various reasons, the case
relating to the Singapore Interbank Offered Rate and Singapore Swap
Offer Rate in July 2019, the case relating to Pound Sterling LIBOR in
August 2019, and the case relating to Swiss Franc LIBOR in
September 2019. Plaintiffs are appealing each of these four dismissals
to the United States Court of Appeals for the Second Circuit. In the
class action relating to Swiss Franc LIBOR, NWM Plc and the plaintiffs
reached a settlement in principle in February 2021. The amount of the
settlement, which remains subject to final documentation and court
approval, is covered by an existing provision. In the fifth class action,
which relates to the Australian Bank Bill Swap Reference Rate, the
SDNY in February 2020 declined to dismiss the amended complaint as
against NWM Plc and certain other defendants, but dismissed it as to
other members of NatWest Group (including NatWest Group plc). The
claims against non-dismissed defendants (including NWM Plc) are
now proceeding in discovery.
NWM Plc was also named as a defendant in a motion to certify a class
action relating to LIBOR in the Tel Aviv District Court in Israel. NWM
Plc filed a motion for cancellation of service, which was granted in July
2020. The claimants appealed that decision and in November 2020 the
appeal was refused and the claim dismissed by the Appellate Court.
The claim could in future be recommenced depending on the outcome
of a separate case under appeal to Israel’s Supreme Court.
In January 2019, a class action antitrust complaint was filed in the
SDNY alleging that the defendants (USD ICE LIBOR panel banks and
affiliates) have conspired to suppress USD ICE LIBOR from 2014 to
the present by submitting incorrect information to ICE about their
borrowing costs. The NatWest Group defendants are NatWest Group
plc, NWM Plc, NWMSI and NWB Plc. The defendants made a motion
to dismiss this case, which was granted by the court in March 2020.
Plaintiffs’ appeal of the dismissal is pending in the United States Court
of Appeals for the Second Circuit.
In August 2020, a complaint was filed in the United States District
Court for the Northern District of California by several United States
consumer borrowers against the USD ICE LIBOR panel banks and
their affiliates, alleging that the normal process of setting USD ICE
LIBOR amounts to illegal price-fixing, and also that banks in the United
States have illegally agreed to use LIBOR as a component of price in
variable consumer loans. The NatWest Group defendants are NatWest
Group plc, NWM Plc, NWMSI and NWB Plc. The plaintiffs seek
damages and to prevent the enforcement of LIBOR-based instruments
through injunction. Defendants have filed a motion to transfer the
matter to federal court in New York and will seek dismissal.
FX litigation
NWM Plc, NWMSI and / or NatWest Group plc are defendants in
several cases relating to NWM Plc’s foreign exchange (FX) business,
each of which is pending before the same federal judge in the SDNY.
In 2015, NWM Plc paid US$255 million to settle the consolidated
antitrust class action on behalf of persons who entered into over-the-
counter FX transactions with defendants or who traded FX instruments
on exchanges. That settlement received final court approval in August
2018. In November 2018, some members of the settlement class who
opted out of the settlement filed their own non-class complaint in the
SDNY asserting antitrust claims against NWM Plc, NWMSI and other
banks. Those opt-out claims are proceeding in discovery. In December
2018, some of the same claimants, as well as others, filed proceedings
in the High Court of Justice of England and Wales, asserting
competition claims against NWM Plc and several other banks. The
claim was served in April 2019.
One other FX-related class action, on behalf of ‘consumers and end-
user businesses’, is proceeding in the SDNY against NWM Plc and
others. Plaintiffs have filed a motion for class certification, which
defendants are opposing. The 2020 settlement of another class action,
on behalf of ‘indirect purchasers’ of FX instruments (which plaintiffs
define as persons who transacted FX instruments with retail foreign
exchange dealers that transacted directly with defendant banks),
received final court approval in November 2020. NWM Plc has paid
the settlement in that case (which was covered by an existing
provision).
In May 2019, a cartel class action was filed in the Federal Court of
Australia against NWM Plc and four other banks on behalf of persons
who bought or sold currency through FX spots or forwards between 1
January 2008 and 15 October 2013 with a total transaction value
exceeding AUS $0.5 million. The claimant has alleged that the banks,
including NWM Plc, contravened Australian competition law by sharing
information, coordinating conduct, widening spreads and manipulating
FX rates for certain currency pairs during this period. NatWest Group
plc has been named in the action as an ‘other cartel participant’, but is
not a respondent. The claim was served in June 2019. The claimant
sought permission to amend its claim to strengthen its claim of alleged
breaches of competition law, but this was refused by the court in the
form sought by the claimant. The claimant now seeks a further
opportunity to amend its claim.
In July and December 2019, two separate applications seeking opt-out
collective proceedings orders were filed in the UK Competition Appeal
Tribunal against NatWest Group plc, NWM Plc and other banks. Both
applications have been brought on behalf of persons who, between 18
December 2007 and 31 January 2013, entered into a relevant FX spot
or outright forward transaction in the EEA with a relevant financial
institution or on an electronic communications network. A hearing to
determine class certification and which of the applications should be
permitted to represent the class is scheduled to take place in July
2021.
In November 2020, proceedings were issued in the High Court of
Justice of England and Wales against NWM Plc by a claimant who
seeks an account of profits or damages in respect of alleged historic
FX trading misconduct. The claimant has also issued similar
proceedings against a number of other banks. The claim against NWM
Plc makes allegations of fraud, deceit and dishonesty, as well as
breaches of contract, fiduciary duties, duties of confidence and other
matters, in respect of FX services provided by NWM Plc during the
period 2006 to 2010. NWM Plc awaits service of the claim.
Two motions to certify FX-related class actions were filed in the Tel
Aviv District Court in Israel in September and October 2018, and were
subsequently consolidated into one motion. The consolidated motion,
which names The Royal Bank of Scotland plc (now NWM Plc) as the
defendant, was served on NWM Plc in May 2020. NWM Plc has filed a
motion for cancellation of service.
Certain other foreign exchange transaction related claims have been
or may be threatened. NatWest Group cannot predict whether any of
these claims will be pursued, but expects that some may.
Government securities antitrust litigation
NWMSI and certain other US broker-dealers are defendants in a
consolidated antitrust class action pending in the SDNY on behalf of
persons who transacted in US Treasury securities or derivatives based
on such instruments, including futures and options. The plaintiffs
allege that defendants rigged the US Treasury securities auction
bidding process to deflate prices at which they bought such securities
and colluded to increase the prices at which they sold such securities
to plaintiffs. The defendants’ motion to dismiss this matter remains
pending.
NatWest Group Annual Report and Accounts 2020
316
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
26 Memorandum items continued
Litigation and regulatory matters
Class action antitrust claims commenced in March 2019 are pending in
the SDNY against NWM Plc, NWMSI and other banks in respect of
Euro-denominated bonds issued by European central banks (EGBs).
The complaint alleges a conspiracy among dealers of EGBs to widen
the bid-ask spreads they quoted to customers, thereby increasing the
prices customers paid for the EGBs or decreasing the prices at which
customers sold the bonds. The class consists of those who purchased
or sold EGBs in the US between 2007 and 2012. The defendants filed
a motion to dismiss this matter, which was granted by the court in
respect of NWM Plc and NWMSI in July 2020, subject to plaintiffs
attempting to remedy the pleading deficiencies identified by the court
through an amended complaint.
Swaps antitrust litigation
NWM Plc and other members of NatWest Group, including NatWest
Group plc, as well as a number of other interest rate swap dealers, are
defendants in several cases pending in the SDNY alleging violations of
the US antitrust laws in the market for interest rate swaps. There is a
consolidated class action complaint on behalf of persons who entered
into interest rate swaps with the defendants, as well as non-class
action claims by three swap execution facilities (TeraExchange,
Javelin, and trueEx). The plaintiffs allege that the swap execution
facilities would have successfully established exchange-like trading of
interest rate swaps if the defendants had not unlawfully conspired to
prevent that from happening through boycotts and other means.
Discovery in these cases is complete, and the plaintiffs’ motion for
class certification remains pending.
In addition, in June 2017, TeraExchange filed a complaint against
NatWest Group companies, including NatWest Group plc, as well as a
number of other credit default swap dealers, in the SDNY.
TeraExchange alleges it would have established exchange-like trading
of credit default swaps if the defendant dealers had not engaged in an
unlawful antitrust conspiracy. In October 2018, the court dismissed all
claims against NatWest Group companies.
Odd lot corporate bond trading antitrust litigation
NWMSI is the subject of a class action antitrust complaint filed in the
SDNY against NWMSI and several other securities dealers. The
complaint alleges that, from August 2006 to the present, the
defendants conspired artificially to widen spreads for odd lots of
corporate bonds bought or sold in the United States secondary market
and to boycott electronic trading platforms that would have allegedly
promoted pricing competition in the market for such bonds.
Defendants filed a motion to dismiss the operative complaint in this
matter in December 2020.
Madoff
NWM N.V. is a defendant in two actions filed by Irving Picard, as
trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L.
Madoff Investment Securities LLC, in bankruptcy court in New York. In
both cases, the trustee alleges that certain transfers received by NWM
N.V. amounted to fraudulent conveyances that should be clawed back
for the benefit of the Madoff estate.
In the primary action, filed in December 2010, the trustee is seeking to
clawback a total of US$276.3 million in redemptions that NWM N.V.
allegedly received from certain Madoff feeder funds and certain swap
counterparties. In March 2020, the bankruptcy court denied the
trustee’s request for leave to amend its complaint to include additional
allegations against NWM N.V., holding that, even with the proposed
amendments, the complaint would fail as a matter of law to state a
valid claim against NWM N.V. The trustee has commenced an appeal
of the bankruptcy court’s decision, which has been stayed pending the
result of appeals in different proceedings, against different defendants,
that involve similar issues. In the second action, filed in October 2011,
the trustee seeks to recover an additional US$21.8 million. This action
has been stayed pending the result of the appeal in the primary action.
Interest rate hedging products and similar litigation
NatWest Group continues to deal with a small number of active
litigation claims in the UK relating to the alleged mis-selling of interest
rate hedging products.
NatWest Group Annual Report and Accounts 2020
317
Separately, NWM Plc is defending claims filed in France by two
French local authorities relating to structured interest rate swaps. The
plaintiffs allege, among other things, that the swaps are void for being
illegal transactions, that they were mis-sold, and that information /
advisory duties were breached. One of the claims is being appealed to
the Supreme Court and the other has been remitted from the Supreme
Court to the Court of Appeal for reconsideration of one aspect. NWM
N.V. was a defendant in the latter case but has been dismissed from
the proceedings.
EUA trading litigation
HMRC issued a tax assessment in 2012 against NatWest Group plc
for approximately £86 million regarding a value-added-tax (VAT)
matter in relation to the trading of European Union Allowances (EUAs)
by a joint venture subsidiary in 2009. NatWest Group plc has lodged
an appeal, which is due to be heard in June 2021, before the First-tier
Tribunal (Tax), a specialist tax tribunal, challenging the assessment
(the ‘Tax Dispute’). In the event that the assessment is upheld, interest
and costs would be payable, and a penalty of up to 100 per cent of the
VAT held to have been legitimately denied by HMRC could also be
levied.
Separately, NWM Plc was a named defendant in civil proceedings
before the High Court of Justice of England and Wales brought in 2015
by ten companies (all in liquidation) (the ‘Liquidated Companies’) and
their respective liquidators (together, ‘the Claimants’). The Liquidated
Companies previously traded in EUAs in 2009 and were alleged to be
defaulting traders within (or otherwise connected to) the EUA supply
chains forming the subject of the Tax Dispute. The Claimants claimed
approximately £71.4 million plus interest and costs and alleged that
NWM Plc dishonestly assisted the directors of the Liquidated
Companies in the breach of their statutory duties and/or knowingly
participated in the carrying on of the business of the Liquidated
Companies with intent to defraud creditors. The trial in that matter
concluded in July 2018 and judgment was issued in March 2020. The
court held that NWM Plc and Mercuria Energy Europe Trading Limited
were liable for dishonestly assisting and knowingly being a party to
fraudulent trading during a seven business day period in 2009. In
October 2020, the High Court quantified damages against NWM Plc at
£45 million plus interest and costs, and permitted it to appeal to the
Court of Appeal. The appeal hearing is due to take place in March
2021.
Offshoring VAT assessments
HMRC issued protective tax assessments in 2018 against NatWest
Group plc totalling £143 million relating to unpaid VAT in respect of the
UK branches of two NatWest Group companies registered in India.
NatWest Group formally requested reconsideration by HMRC of their
assessments, and this process was completed in November 2020.
HMRC upheld their original decision and, as a result, NatWest Group
plc lodged an appeal with the Tax Tribunal and an application for
judicial review with the High Court of Justice of England and Wales,
both in December 2020. In order to lodge the appeal with the Tax
Tribunal, NatWest Group plc was required to pay the £143 million to
HMRC, and payment was made on 16 December 2020.
US Anti-Terrorism Act litigation
NWB Plc is defending lawsuits filed in the United States District Court
for the Eastern District of New York by a number of US nationals (or
their estates, survivors, or heirs) who were victims of terrorist attacks
in Israel. The plaintiffs allege that NWB Plc is liable for damages
arising from those attacks pursuant to the US Anti-Terrorism Act
because NWB Plc previously maintained bank accounts and
transferred funds for the Palestine Relief & Development Fund, an
organisation which plaintiffs allege solicited funds for Hamas, the
alleged perpetrator of the attacks.
In October 2017, the trial court dismissed claims against NWB Plc with
respect to two of the 18 terrorist attacks at issue. In March 2018, the
trial court granted a request by NWB Plc for leave to file a renewed
summary judgment motion in respect of the remaining claims, and in
March 2019, the court granted summary judgment in favour of NWB
Plc. The plaintiffs’ appeal of the judgment to the United States Court of
Appeals for the Second Circuit is pending.
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
26 Memorandum items continued
Litigation and regulatory matters
NWM N.V. and certain other financial institutions are defendants in
several actions pending in the United States District Courts for the
Eastern and Southern Districts of New York, filed by a number of US
nationals (or their estates, survivors, or heirs), most of whom are or
were US military personnel, who were killed or injured in attacks in Iraq
between 2003 and 2011. NWM Plc is also a defendant in some of
these cases.
The attacks at issue in the cases were allegedly perpetrated by
Hezbollah and certain Iraqi terror cells allegedly funded by the Islamic
Republic of Iran. According to the plaintiffs’ allegations, the defendants
are liable for damages arising from the attacks because they allegedly
conspired with Iran and certain Iranian banks to assist Iran in
transferring money to Hezbollah and the Iraqi terror cells, in violation of
the US Anti-Terrorism Act, by agreeing to engage in ‘stripping’ of
transactions initiated by the Iranian banks so that the Iranian nexus to
the transactions would not be detected.
The first of these actions was filed in the United States District Court
for the Eastern District of New York in November 2014. In September
2019, the district court dismissed the case, finding that the claims were
deficient for several reasons, including lack of sufficient allegations as
to the alleged conspiracy and causation. The plaintiffs are appealing
the decision to the United States Court of Appeals for the Second
Circuit. Another action, filed in the SDNY in 2017, was dismissed in
March 2019 on similar grounds, but remains subject to appeal to the
United States Court of Appeals for the Second Circuit. Other follow-on
actions that are substantially similar to the two that have now been
dismissed are pending in the same courts.
Securities underwriting litigation
NWMSI is an underwriter defendant in several securities class actions
in the US in which plaintiffs generally allege that an issuer of public
debt or equity securities, as well as the underwriters of the securities
(including NWMSI), are liable to purchasers for misrepresentations
and omissions made in connection with the offering of such securities.
Regulatory matters (including investigations and customer
redress programmes)
NatWest Group’s businesses and financial condition can be affected
by the actions of various governmental and regulatory authorities in
the UK, the US, the EU and elsewhere. NatWest Group has engaged,
and will continue to engage, in discussions with relevant governmental
and regulatory authorities, including in the UK, the US, the EU and
elsewhere, on an ongoing and regular basis, and in response to
informal and formal inquiries or investigations, regarding operational,
systems and control evaluations and issues including those related to
compliance with applicable laws and regulations, including consumer
protection, investment advice, business conduct, competition/anti-trust,
VAT recovery, anti-bribery, anti-money laundering and sanctions
regimes.
The NatWest Markets business in particular has been providing, and
continues to provide, information regarding a variety of matters,
including, for example, offering of securities, the setting of benchmark
rates and related derivatives trading, conduct in the foreign exchange
market, product mis-selling and various issues relating to the issuance,
underwriting, and sales and trading of fixed-income securities,
including structured products and government securities, some of
which have resulted, and others of which may result, in investigations
or proceedings.
Any matters discussed or identified during such discussions and
inquiries may result in, among other things, further inquiry or
investigation, other action being taken by governmental and regulatory
authorities, increased costs being incurred by NatWest Group,
remediation of systems and controls, public or private censure,
restriction of NatWest Group’s business activities and/or fines. Any of
the events or circumstances mentioned in this paragraph or below
could have a material adverse effect on NatWest Group, its business,
authorisations and licences, reputation, results of operations or the
price of securities issued by it, or lead to material additional provisions
being taken.
NatWest Group is co-operating fully with the matters described below.
Investigations
US investigations relating to fixed-income securities
In the US, NatWest Group companies have in recent years been
involved in investigations relating to, among other things, issuance,
underwriting and trading in RMBS and other mortgage-backed
securities and collateralised debt obligations (CDOs). Investigations by
the US Department of Justice (DoJ) and several state attorneys
general relating to the issuance and underwriting of RMBS were
previously resolved. In December 2020, RBS Financial Products, Inc.
agreed to pay US$18.2 million to resolve such an investigation by the
State of Maryland. RBS Financial Products, Inc. has paid the
settlement amount, which was covered by an existing provision.
In October 2017, NWMSI entered into a non-prosecution agreement
(NPA) with the United States Attorney for the District of Connecticut
(USAO) in connection with alleged misrepresentations to
counterparties relating to secondary trading in various forms of asset-
backed securities. In the NPA, the USAO agreed not to file criminal
charges relating to certain conduct and information described in the
NPA, conditioned on NWMSI and affiliated companies complying with
the NPA’s reporting and conduct requirements during its term,
including by not engaging in conduct during the NPA that the USAO
determines was a felony under federal or state law or a violation of the
anti-fraud provisions of the United States securities law.
The NatWest Markets business is currently responding to a separate
criminal investigation by the USAO and DoJ concerning unrelated
trading by certain NatWest Markets former traders involving alleged
spoofing. The NPA (referred to above) has been extended as the
criminal investigation has progressed and related discussions with the
USAO and the DoJ, including relating to the impact of such alleged
conduct on the status of the NPA and the potential consequences
thereof, have been ongoing. The duration and outcome of these
matters remain uncertain, including in respect of whether settlement
may be reached. Material adverse collateral consequences, in addition
to further substantial costs and the recognition of further provisions,
may occur depending on the outcome of the investigations, as further
described in the Risk Factor relating to legal, regulatory and
governmental actions and investigations set out on page 360.
Foreign exchange related investigations
In 2014 and 2015, NWM Plc paid significant penalties to resolve
investigations into its FX business by the FCA, the Commodity Futures
Trading Commission, the DoJ, and the Board of Governors of the
Federal Reserve System. In May and June 2019, NatWest Group plc
and NWM Plc reached settlements totalling approximately EUR 275
million in connection with the European Commission and certain other
related competition law investigations into FX trading. NWM Plc
continues to co-operate with ongoing investigations from competition
authorities on similar issues relating to past FX trading. The exact
timing and amount of future financial penalties, related risks and
collateral consequences remain uncertain and may be material.
FCA investigation into NatWest Group’s compliance with the Money
Laundering Regulations 2007
In July 2017, the FCA notified NatWest Group that it was undertaking
an investigation into NatWest Group’s compliance with the UK Money
Laundering Regulations 2007 in relation to certain money service
businesses and related parties. The investigation is assessing both
criminal and civil culpability. NatWest Group is co-operating with the
investigation, including responding to information requests from the
FCA.
Systematic Anti-Money Laundering Programme assessment
In December 2018, the FCA commenced a Systematic Anti-Money
Laundering Programme assessment of NatWest Group. The FCA
provided its written findings to NatWest Group in June 2019, and
NatWest Group responded on 8 August 2019. On 28 August 2019, the
FCA instructed NatWest Group to appoint a Skilled Person under
section 166 of the Financial Services and Markets Act 2000 to provide
assurance on financial crime governance arrangements in relation to
two financial crime change programmes. NatWest Group is co-
operating with the Skilled Person’s review, which is ongoing.
NatWest Group Annual Report and Accounts 2020
318
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
26 Memorandum items continued
Litigation and regulatory matters
FCA mortgages market study
In December 2016, the FCA launched a market study into the
provision of mortgages. In March 2019 the final report was published.
This found that competition was working well for many customers but
also proposed remedies to help customers shop around more easily
for mortgages. A period of consultation is underway and the FCA has
indicated that it intends to provide updates on the remedies in due
course.
Review and investigation of treatment of tracker mortgage customers
in Ulster Bank Ireland DAC
In December 2015, correspondence was received from the CBI setting
out an industry examination framework in respect of the sale of tracker
mortgages from approximately 2001 until the end of 2015. The redress
and compensation phase has concluded, although an appeals process
is currently anticipated to run until at least the end of 2021. NatWest
Group has made provisions totalling €335 million (£301 million), of
which €284 million (£255 million) had been utilised by 31 December
2020 in respect of redress and compensation.
In April 2016, the CBI commenced an investigation alleging that it
suspected UBI DAC of breaching specified provisions of the Consumer
Protection Code 2006 in its treatment of certain tracker mortgage
customers. This investigation is ongoing.
UBI DAC identified further legacy business issues, as an extension to
the tracker mortgage review. These remediation programmes are
ongoing. NatWest Group has made provisions of €164 million (£147
million), of which €144 million (£129 million) had been utilised by 31
December 2020 for these programmes.
Customer redress programmes
FCA review of NatWest Group’s treatment of SMEs
In 2014, the FCA appointed an independent Skilled Person under
section 166 of the Financial Services and Markets Act 2000 to review
NatWest Group’s treatment of SME customers whose relationship was
managed by NatWest Group’s Global Restructuring Group (GRG) in
the period 1 January 2008 to 31 December 2013. In response to the
Skilled Person’s final report and update in 2016, NatWest Group
announced redress steps for SME customers in the UK and the
Republic of Ireland that were in GRG between 2008 and 2013. These
steps were (i) an automatic refund of certain complex fees; and (ii) a
new complaints process, overseen by an independent third party. The
complaints process has since closed to new complaints.
NatWest Group’s remaining provisions in relation to these matters at
31 December 2020 were £30 million.
Investment advice review
During October 2019, the FCA notified NatWest Group of its intention
to appoint a Skilled Person under section 166 of the Financial Services
and Markets Act 2000 to conduct a review of whether NatWest
Group’s past business review of investment advice provided during
2010 to 2015 was subject to appropriate governance and
accountability and led to appropriate customer outcomes. NatWest
Group is co-operating with the Skilled Person’s review and, subject to
discussion with the FCA, expects to conduct additional review /
remediation work during 2021. Accordingly, NatWest Group
recognised an increased provision in relation to these matters at 31
December 2020.
NatWest Group Annual Report and Accounts 2020
319
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
27 Analysis of the net investment in business interests and intangible assets
Acquisitions and disposals
Fair value given for businesses acquired (1)
Additional investment in associates
Net outflow of cash in respect of acquisitions
Sale of interests in associates
Net assets sold
Profit on disposal
Net inflow of cash in respect of disposals
Dividends received from associates
Cash expenditure on intangible assets
Net outflow of cash
Note:
(1) 2019 includes the purchase of Free agent.
28 Analysis of changes in financing during the year
2020
£m
—
(40)
(40)
27
288
3
318
—
(348)
(70)
2019
£m
(55)
—
(55)
—
351
—
351
—
(380)
(84)
2018
£m
(113)
(9)
(122)
—
—
—
—
5
(364)
(481)
At 1 January
Issue of ordinary shares
Issue of paid in equity
Issue of subordinated liabilities
Redemption of subordinated liabilities
Interest on subordinated liabilities
Issue of MRELs
Maturity/redemption of MRELs
Interest on MRELs
Net cash inflow/(outflow) from financing
Ordinary shares issued
Effects of foreign exchange
Changes in fair value of subordinated
liabilities/MRELs
Share capital, share premium,
and paid-in equity
2020
£m
17,246
—
2,218
2019
£m
17,134
2018
£m
16,910
17
—
144
—
Subordinated liabilities
2020
£m
9,979
2019
£m
10,535
2018
£m
12,722
2020
£m
19,249
MRELs
2019
£m
16,821
2018
£m
9,202
1,631
(3,502)
(510)
577
(1,108)
(533)
—
(2,258)
(566)
2,218
52
17
95
144
80
(2,381)
(1,064)
(2,824)
1,309
(2)
(671)
636
3,640
(1,285)
(428)
1,927
(234)
(315)
419
(514)
(683)
133
317
(243)
829
539
6,996
(83)
(237)
6,676
587
(59)
AT1 reclassification to subordinated liabilities
(1,277)
—
—
1,632
Loss on sale of MRELs and subordinated
liabilities
Interest on subordinated liabilities/MRELs
At 31 December
18,239
17,246
17,134
324
509
9,962
—
—
—
—
—
—
—
506
9,979
461
10,535
673
20,873
645
19,249
415
16,821
29 Analysis of cash and cash equivalents
At 1 January
- cash
- cash equivalents
Net cash outflow
At 31 December
Comprising:
Cash and balances at central banks
Trading assets
Other financial assets
Loans to banks - amortised cost (1)
Cash and cash equivalents
2020
£m
2019
£m
2018
£m
80,993
19,595
100,588
38,611
139,199
124,489
9,220
173
5,317
139,199
91,368
17,568
108,936
(8,348)
100,588
80,993
12,578
459
6,558
100,588
100,724
21,881
122,605
(13,669)
108,936
91,368
11,610
40
5,918
108,936
Note:
(1) Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £7,592 million (2019 - £7,570 million; 2018 - £7,302 million).
Certain members of NatWest Group are required by law or regulation to maintain balances with the central banks in the jurisdictions in which
they operate. Natwest Markets N.V. had mandatory reserve deposits with De Nederlandsche Bank N.V. of €81 million (2019 - €47 million).
NatWest Group Annual Report and Accounts 2020
320
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
30 Directors' and key management remuneration
Directors' remuneration
Non-executive Directors
Chairman and executive directors
- emoluments
Amounts receivable under long-term incentive plans and share option plans
Total
2020
£000
1,708
4,349
6,057
609
6,666
2019
£000
1,881
4,783
6,664
741
7,405
No directors accrued benefits under defined benefit schemes or defined contribution schemes during 2020 and 2019.
The executive directors may participate in the company's long-term incentive plans, executive share option and sharesave schemes and details
of their interests in the company's shares arising from their participation are given in the directors' remuneration report. Details of the
remuneration received by each director are also given in the directors' remuneration report.
Compensation of key management
The aggregate remuneration of directors and other members of key management during the year was as follows:
Short-term benefits
Post-employment benefits
Share-based payments
2020
£000
18,718
474
3,249
22,441
2019
£000
22,067
401
2,435
24,903
Key management comprises members of the NatWest Group plc and NWH Ltd Boards, members of the NatWest Group plc and NWH Ltd
Executive Committees, and the Chief Executives of NatWest Markets Plc and RBS International (Holdings) Limited. This is on the basis that
these individuals have been identified as Persons Discharging Managerial Responsibilities of NatWest Group plc under the new governance
structure.
31 Transactions with directors and key management
At 31 December 2020, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in
NatWest Group, as defined in UK legislation, were £1,329,102 in respect of loans to five persons who were directors of the company at any time
during the financial period.
For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the company and Persons Discharging
Managerial Responsibilities (PDMRs) of NatWest Group plc. The captions in the NatWest Group's primary financial statements include the
following amounts attributable, in aggregate, to key management:
Loans to customers - amortised cost
Customer deposits
2020
£000
5,165
45,747
2019
£000
1,662
37,727
Key management have banking relationships with NatWest Group entities which are entered into in the normal course of business and on
substantially the same terms, including interest rates and security, as for comparable transactions with other persons of a similar standing or,
where applicable, with other employees. These transactions did not involve more than the normal risk of repayment or present other
unfavourable features.
NatWest Group Annual Report and Accounts 2020
321
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements
32 Related parties
UK Government
The UK Government through HM Treasury is the ultimate controlling
party of The NatWest Group plc. The UK government’s shareholding is
managed by UK Government Investments Limited, a company wholly
owned by the UK Government. As a result the UK Government and
UK Government controlled bodies are related parties of the Group.
At 31 December 2020, HM Treasury’s holding in the company’s
ordinary shares was 61.9%.
NatWest Group enters into transactions with many of these bodies.
Transactions include the payment of: taxes – principally UK
corporation tax (Note 7) and value added tax; national insurance
contributions; local authority rates; and regulatory fees and levies
(including the bank levy (Note 3) and FSCS levies (Note 26) - together
with banking transactions such as loans and deposits undertaken in
the normal course of banker-customer relationships.
Bank of England facilities
NatWest Group may participate in a number of schemes operated by
the Bank of England in the normal course of business.
Members of NatWest Group that are UK authorised institutions are
required to maintain non-interest bearing (cash ratio) deposits with the
Bank of England amounting to 0.368% of their average eligible
liabilities in excess of £600 million. They also have access to Bank of
England reserve accounts: sterling current accounts that earn interest
at the Bank of England Base Rate.
NatWest Group provides guarantees for certain subsidiary liabilities to
the Bank of England.
Other related parties
(a) In their roles as providers of finance, NatWest Group companies
provide development and other types of capital support to
businesses. These investments are made in the normal course of
business. In some instances, the investment may extend to
ownership or control over 20% or more of the voting rights of the
investee company. However, these investments are not
considered to give rise to transactions of a materiality requiring
disclosure under IAS 24.
(b) NatWest Group recharges NatWest Group Pension Fund with the
cost of administration services incurred by it. The amounts
involved are not material to NatWest Group.
(c) In accordance with IAS 24, transactions or balances between
NatWest Group entities that have been eliminated on consolidation
are not reported.
(d) The captions in the primary financial statements of the parent
company include amounts attributable to subsidiaries. These
amounts have been disclosed in aggregate in the relevant notes to
the financial statements.
33 Post balance sheet events
NatWest Group has announced a phased withdrawal from the Republic of Ireland and has entered into a non-binding Memorandum of
Understanding (‘MOU’) with Allied Irish Banks, p.l.c. for the sale of a c.€4bn portfolio of performing commercial loans. The potential sale
contemplated by the MoU remains subject to due diligence, further negotiation and agreement of final terms and definitive documentation, as
well as obtaining regulatory and other approvals and satisfying other conditions. The proposed sale may not be concluded on the terms
contemplated in the MoU, or at all. No estimate of any financial effect of the potential transaction can be made at the date of approval of these
accounts.
On 18 February 2021, NatWest Group reached final agreement with the Official Receiver in relation to a portfolio of historical PPI claims.
NatWest Group carried adequate provision for this outcome and there is no further charge/release as a result.
Other than as disclosed in the accounts, there have been no other significant events between 31 December 2020 and the date of approval of
these accounts which would require a change or additional disclosure.
NatWest Group Annual Report and Accounts 2020
322
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
Balance sheet as at 31 December 2020
Assets
Derivatives with subsidiaries
Amounts due from subsidiaries
Other financial assets
Investments in Group undertakings
Other assets
Total assets
Liabilities
Amounts due to subsidiaries
Derivatives with subsidiaries
Other financial liabilities
Subordinated liabilities
Other liabilities
Total liabilities
Owners’ equity
Total liabilities and equity
Note
2020
£m
2019
£m
4
9
4
8
1,580
26,910
579
46,229
117
75,415
723
1,102
21,056
7,944
151
30,976
44,439
75,415
979
25,018
277
55,808
1
82,083
439
711
19,331
7,647
168
28,296
53,787
82,083
Owners’ equity includes a total comprehensive loss for the year, dealt with in the accounts of the parent company, of £9,598 million (2019 -
£2,712 million profit). This is due to a VIU write down in subsidiaries that eliminates on consolidation in the Group Accounts.
As permitted by section 408(3) of the Companies Act 2006, the primary financial statements of the company do not include an income statement
or a statement of comprehensive income.
The accompanying notes on pages 326 to 338 form an integral part of these financial statements.
The accounts were approved by the Board of directors on 19 February 2021 and signed on its behalf by:
Howard Davies
Chairman
Alison Rose-Slade
Group Chief Executive Officer
Katie Murray
Group Chief Financial Officer
NatWest Group plc
Registered No. SC45551
NatWest Group Annual Report and Accounts 2020
323
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
Statement of changes in equity for the year ended 31 December 2020
Called-up share capital - at 1 January (1)
Ordinary shares issued
At 31 December
Paid-in equity - at 1 January
Redeemed/reclassified (2)
Securities issued during the period (3)
At 31 December
Share premium account - at 1 January
Ordinary shares issued
At 31 December
Cash flow hedging reserve - at 1 January
Amount recognised in equity
Amount transferred from equity to earnings
Tax
At 31 December
Retained earnings - at 1 January
Implementation of IFRS 9 on 1 January 2018
(Loss)/profit attributable to ordinary shareholders and other equity owners
Equity preference dividends paid
Ordinary dividend paid
Paid-in equity dividends paid
Unclaimed dividend
Redemption of equity preference shares (4)
Redemption/reclassification of paid-in equity (2)
At 31 December
2020
£m
2019
£m
2018
£m
12,094
35
12,129
4,047
(1,277)
2,209
4,979
1,094
17
1,111
67
4
(33)
4
42
36,485
—
(9,573)
(26)
—
(355)
2
—
(355)
26,178
12,049
45
12,094
11,965
84
12,049
4,047
—
—
4,047
1,027
67
1,094
83
18
(39)
5
67
37,181
—
2,728
(39)
(3,018)
(367)
—
—
—
36,485
4,047
—
—
4,047
887
140
1,027
20
103
(25)
(15)
83
38,042
231
2,491
(182)
(241)
(355)
—
(2,805)
—
37,181
Owners’ equity at 31 December
44,439
53,787
54,387
Notes:
(1) Details of the company’s share capital are set out in Note 21 to the consolidated accounts.
(2) Paid-in equity reclassified to liabilities as the result of a call of US$2 billion AT1 notes in June 2020, redeemed in August 2020.
(3) AT1 capital notes totalling US$1.5 billion less fees issued in June 2020. In November 2020 AT1 capital notes totalling £1.0 billion less fees were issued.
(4) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed.
The accompanying notes on pages 326 to 338 form an integral part of these financial statements.
NatWest Group Annual Report and Accounts 2020
324
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
Cash flow statement for the year ended 31 December 2020
Operating (loss)/profit before tax
Adjustments for:
Write-down of investment in group undertakings
Change in fair value taken to profit or loss on other financial liabilities and subordinated liabilities
Elimination of foreign exchange differences
Other non-cash items
Dividends received from subsidiaries
Profit on sale of investment in group undertakings
Interest payable on MRELs and subordinated liabilities
Loss on sale of MRELs and subordinated liabilities
Charges and releases on provisions
Net cash flows from trading activities
Increase in derivative assets with subsidiaries
(Increase)/decrease in amounts due from subsidiaries
Increase in other financial assets
(Increase)/decrease in other assets
Increase/(decrease) in amounts due to subsidiaries
Increase in derivative liabilities with subsidiaries
Increase/(decrease) in other financial liabilities
Decrease in other liabilities
Change in operating assets and liabilities
Income taxes received
Net cash flows from operating activities (1)
Net movement in business interests
Disposal of subsidiaries and associates
Dividends received from subsidiaries
Net cash flows from investing activities
Movement in MRELs
Movement in subordinated liabilities
Issue of ordinary shares
Dividends paid
Issue of paid in equity
Redemption of other equity instruments
Net cash flows from financing activities
Effects of exchange rate changes on cash and cash equivalents
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December (2)
2020
£m
(9,698)
9,606
672
(540)
(31)
(485)
—
537
324
(8)
377
(598)
(792)
(302)
(2)
289
391
2
(33)
(1,045)
40
(628)
(27)
—
485
458
(147)
(1,972)
109
(381)
2,209
—
(182)
1
(351)
539
188
2019
£m
2,799
1,489
221
(526)
(23)
(5,596)
1,739
513
—
(25)
591
(436)
863
(36)
113
(193)
266
(1)
—
576
15
1,182
(676)
234
3,751
3,309
(142)
(709)
17
(3,424)
—
—
(4,258)
(1)
232
307
539
2018
£m
2,341
293
(144)
986
478
—
—
846
—
—
4,800
(380)
12,290
(131)
(16)
466
161
—
(211)
12,179
49
17,028
(9,481)
—
—
(9,481)
(3,317)
(710)
144
(798)
—
(2,805)
(7,486)
1
62
245
307
Notes:
(1)
(2) Cash and cash equivalents are comprised of intragroup loans and advances with a maturity of less than 3 months for 2020, 2019 and 2018.
Includes interest received of £344 million (2019 - £371 million, 2018 - £508 million) and interest paid of £816 million (2019 - £988 million, 2018 - £819 million).
NatWest Group Annual Report and Accounts 2020
325
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
1. Presentation of accounts
The accounts are prepared on a going concern basis (refer to the Report of the directors on page 153) and in accordance with International
Accounting Standards in conformity with the requirements of the Companies Act 2006.
The parent company is incorporated in the UK and registered in Scotland. The accounts are prepared on the historical cost basis except that
derivatives and certain financial instruments which are stated at fair value. Recognised financial assets and financial liabilities in fair value
hedges are adjusted for changes in fair value in respect of the risk that is hedged.
The accounting policies that are applicable to the parent company are included in NatWest Group plc’s accounting policies which are set out on
pages 264 to 268 of the consolidated financial statements, except that it has no policy regarding ‘Basis of consolidation’.
2. Critical accounting policies and sources of estimation uncertainty
The reported results of the company are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its
financial statements. The judgements and assumptions involved in the company’s accounting policies that are considered by the Board to be
the most important to the portrayal of its financial condition are those involved in assessing the impairment, if any, in its investments in
subsidiaries. At each reporting date, the company assesses whether there is any indication that its investment in a subsidiary is impaired. If any
such indication exists, the company undertakes an impairment test by comparing the carrying value of the investment in the subsidiary with its
estimated recoverable amount. The recoverable amount of an investment in a subsidiary is the higher of its fair value less cost to sell and its
value in use. Impairment testing inherently involves a number of judgments: the choice of appropriate discount and growth rates; and the
estimation of fair value.
Future accounting developments
International Financial Reporting Standards
A number of IFRSs and amendments to IFRS were in issue at 31 December 2020. NatWest Group plc is assessing the effect of adopting these
standards on its financial statements.
3 Derivatives with subsidiaries – designated hedges
Fair value hedging is used to hedge loans and other financial liabilities, and cash flow hedging is used to hedge other financial liabilities and
subordinated liabilities.
Derivatives held for designated hedging purposes are as follows:
Fair value hedging - interest rate contracts
Cash flow hedging - exchange rate contracts
Total
2020
2019
Notional
Assets
Liabilities
Notional
Assets
Liabilities
£bn
25.0
5.8
£m
1,537
7
1,544
£m
359
3
362
£bn
25.2
8.4
£m
953
23
976
£m
243
—
243
NatWest Group Annual Report and Accounts 2020
326
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
4 Financial instruments – classification
The following tables analyse NWG plc’s financial assets and liabilities in accordance with the categories of financial instruments on an IFRS 9
basis. Assets and liabilities outside the scope of IFRS 9 are shown within other assets and other liabilities.
Total
£m
1,580
26,910
579
46,229
117
75,415
979
25,018
277
55,808
1
82,083
Total
£m
723
1,102
21,056
7,944
151
30,976
439
711
19,331
7,647
168
28,296
2019
£m
10,984
14,034
25,018
979
307
16
116
439
711
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Assets
Derivatives with subsidiaries
Amounts due from subsidiaries
Other financial assets
Investment in Group undertakings
Other assets
31 December 2020
Derivatives with subsidiaries
Amounts due from subsidiaries
Other financial assets
Investment in Group undertakings
Other assets
31 December 2019
Liabilities
Amounts due to subsidiaries
Derivatives with subsidiaries
Other financial liabilities
Subordinated liabilities
Other liabilities
31 December 2020
Amounts due to subsidiaries
Derivatives with subsidiaries
Other financial liabilities
Subordinated liabilities
Other liabilities
31 December 2019
Amounts due from/to subsidiaries
Assets
Loans to banks and customers - amortised cost
Other financial assets/other assets
Amounts due from subsidiaries
Derivatives (1)
Liabilities
Bank and customer deposits - amortised cost
Other liabilities
Subordinated liabilities
Amounts due to subsidiaries
Derivatives (1)
MFVTPL
£m
1,580
15,506
576
17,662
979
14,029
274
15,282
Held-for-
trading
£m
542
1,102
FVOCI
£m
—
3
3
—
3
3
DFV
£m
—
3,987
Amortised
cost
£m
11,404
11,404
Other
assets
£m
—
46,229
117
46,346
10,984
5
10,984
Amortised
cost
£m
111
17,069
7,944
1,644
3,987
25,124
307
711
—
116
2,677
16,654
7,647
1,018
2,677
24,417
55,808
1
55,814
Other
liabilities
£m
70
151
221
16
168
184
2020
£m
11,404
15,506
26,910
1,580
542
70
111
723
1,102
Note:
(1)
Intercompany derivatives are included within derivative classification on the balance sheet.
NatWest Group Annual Report and Accounts 2020
327
Parent company financial statements and notes
5 Financial instruments
Interest rate benchmark reform
The table below provides an overview of NWG plc’s IBOR related exposure by currency and nature of financial instruments. Non-derivative
financial instruments are presented on the basis of their carrying amounts excluding expected credit losses while derivative financial instruments
are presented on the basis of their notional amount.
Amounts due from subsidiaries
Other financial assets
Amounts due to subsidiaries
Other financial liabilities
Subordinated liabilities
Derivatives notional - with subsidiaries (£bn)
Balances not
Expected
Rates subject to IBOR reform
subject to
GBP LIBOR
USD IBOR (1)
EUR IBOR
Other IBOR
IBOR reform
£m
1,422
—
—
—
—
4.1
£m
11,908
—
—
9,540
767
£m
4,557
—
—
4,187
—
23.7
9.8
£m
38
—
—
108
—
0.1
£m
8,996
579
653
7,221
7,177
11.4
credit
losses
£m
(11)
—
Total
£m
26,910
579
653
21,056
7,944
49.1
Note:
(1)
USD LIBOR is now expected to convert to alternative risk free rates in mid-2023.
AT1 Issuances
As part of its capital management activities NatWest Group plc has acquired certain equity instruments issued by its subsidiaries which contain
reset clauses linked to IBOR rates subject to reform. These are reported in investment in group undertakings.
These are outlined below:
USD$ 2 billion 8.0169%
GBP£ 300 million 6.597%
USD$ 2.65 billion 7.9916%
USD$ 950 million 7.9604%
USD$ 200 million 5.540%
£m
1,581
300
2,095
749
155
6 Financial instruments - fair value of financial instruments not carried at fair value
The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.
Financial assets
Amounts due from subsidiaries (1)
Financial liabilities
Amounts due to subsidiaries (2)
Other financial liabilities - debt securities in issue (3)
Subordinated liabilities (3)
2020
Carrying
value
£bn
Fair value
£bn
2019
Carrying
value
£bn
Fair value
£bn
11.4
11.7
11.0
11.3
0.1
17.1
7.9
0.1
17.7
8.6
0.1
16.7
7.6
0.1
17.3
8.4
Notes:
(1) Fair value hierarchy level 2 - £6.4 billion (2019 - £6.1 billion) and level 3 - £5.3 billion (2019 - £5.2 billion).
(2) Fair value hierarchy level 3.
(3) Fair value hierarchy level 2.
7 Financial instruments - maturity analysis
Remaining maturity
The following table shows the residual maturity of financial instruments based on contractual date of maturity.
Assets
Derivatives with subsidiaries
Amounts due from subsidiaries (1)
Other financial assets
Liabilities
Amounts due to subsidiaries (2)
Derivatives with subsidiaries
Other financial liabilities
Subordinated liabilities
Less than
12 months
£m
2020
More than
12 months
£m
3
5,591
—
543
38
203
36
1,577
21,319
579
110
1,064
20,853
7,908
Less than
12 months
£m
9
5,314
—
2019
More than
12 months
£m
970
19,699
277
309
38
203
33
114
673
19,128
7,614
Total
£m
1,580
26,910
579
653
1,102
21,056
7,944
Total
£m
979
25,013
277
423
711
19,331
7,647
Notes:
(1) Amounts due from subsidiaries relating to non-financial instruments of nil (2019 - £5 million) have been excluded from the table.
(2) Amounts due to subsidiaries relating to non-financial instruments of £70 million (2019 - £16 million) have been excluded from the table.
NatWest Group Annual Report and Accounts 2020
328
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
7 Financial instruments - maturity analysis continued
Financial liabilities: contractual maturity
The following table shows undiscounted cash flows payable up to 20 years from the balance sheet date, including future interest payments.
Held-for-trading liabilities amounting to £1.3 billion (2019 - £0.8 billion) have been excluded from the tables.
2020
Liabilities by contractual maturity
Amounts due to subsidiaries (1)
Derivatives held for hedging
Other financial liabilities
Subordinated liabilities
2019
Liabilities by contractual maturity
Amounts due to subsidiaries (1)
Derivatives held for hedging
Other financial liabilities
Subordinated liabilities
0-3 months
£m
3-12 months
£m
1-3 years
£m
3-5 years
£m
5-10 years
£m
10-20 years
£m
—
47
222
22
291
3
1
231
21
256
7
73
420
361
861
7
56
420
405
888
18
187
9,884
3,728
13,817
18
46
5,623
3,444
9,131
18
117
4,814
2,558
7,507
18
66
8,444
4,987
13,515
44
30
6,522
907
7,503
45
7
8,297
387
8,736
88
—
—
674
762
91
—
—
1,301
1,392
Note:
(1) Amounts due to subsidiaries relating to non-financial instruments have been excluded from the tables.
NatWest Group Annual Report and Accounts 2020
329
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
8 Subordinated liabilities
Dated loan capital
Undated loan capital
Preference shares
Note:
(1) Table excludes amounts due to NatWest Group subsidiaries of £111 million (2019 - £116 million).
Redemptions in the period are disclosed in Note 19 on the consolidated accounts.
2020
£m
7,768
175
1
7,944
2019
£m
6,980
666
1
7,647
Certain preference shares issued by the company are classified as liabilities; these securities remain subject to the capital maintenance rules of
the Companies Act 2006.
Dated loan capital
US$2,250 million 6.13% dated notes 2022
US$650 million 6.425% dated notes 2043 (callable January 2034) (1)
US$2,000 million 6.00% dated notes 2023
US$1,000 million 6.10% dated notes 2023
US$2,250 million 5.13% dated notes 2024
US$750 million 3.754% dated notes 2029
US$850 million 3.032% dated notes 2035 (callable November 2030)
£1,000 million 3.622% dated notes 2030
Note:
(1) The call is on the underlying security in the partnership, rather than the internal issued debt.
Undated loan capital
US$106 million floating rate notes (callable semi-annually)
US$762 million 7.648% notes (callable September 2031) (1)
Capital
treatment
Tier 2
Ineligible
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
Capital
treatment
Ineligible
Ineligible
2020
£m
1,234
593
1,574
419
1,778
551
606
1,013
7,768
2020
£m
78
97
175
Note:
(1) The company can satisfy interest payment obligations by issuing sufficient ordinary shares to appointed trustees to enable them, on selling these shares, to
settle the interest payment.
Preference shares (1)
£0.5 million 11% and £0.4 million 5.5% cumulative preference shares of £1 (not callable)
Note:
(1) Further details of the contractual terms of the preference shares are given in Note 21 on the consolidated accounts.
The following table analyses intercompany subordinated liabilities:
Undated loan capital
US$150 million 8.00% undated notes 2012
Capital
treatment
Ineligible
Capital
treatment
Tier 2
2020
£m
1
2020
£m
112
NatWest Group Annual Report and Accounts 2020
330
2019
£m
1,737
554
1,578
773
1,769
569
—
—
6,980
2019
£m
81
585
666
2019
£m
1
2019
£m
116
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
9 Investments in Group undertakings
Investments in Group undertakings are carried at cost less impairment losses. Movements during the year were as follows:
At 1 January
Currency translation and other adjustments
Additional investments in Group undertakings
Disposals
Impairment of investments
At 31 December
2020
£m
55,808
—
27
—
(9,606)
46,229
2019
£m
56,747
(38)
2,523
(1,973)
(1,451)
55,808
In 2020 the company invested additional capital in its subsidiaries of £27 million of equity (NWM Plc and RBS AA Holdings). The 2019 additional
investments were mainly related to NatWest Markets Plc.
The key judgement is in determining the recoverable amount. This is the higher of net realisable value and value in use, being an assessment of
the discounted future cash flows of the entity. The 2020 charge is mostly related to the company’s investment in NatWest Holdings Limited
which was impaired by £9 billion at 30 June 2020 and £320 million at 31 December 2020, primarily due to the decline in net realisable value as
a result of challenging market conditions, including the impact of the COVID-19 pandemic. The company’s investment in NatWest Markets Plc
was impaired by £286 million at 31 December 2020, due to a decline in net realisable value. Therefore, the carrying value of investments in
Group undertakings at the year end is supported by the respective net realisable values of the entities.
The principal subsidiary undertakings of the company are shown below. Their capital consists of ordinary shares, preference shares and
additional Tier 1 notes which are unlisted with the exception of certain preference shares listed by NWB Plc. All of these subsidiaries are
included in NatWest Group’s consolidated financial statements and have an accounting reference date of 31 December.
National Westminster Bank Plc (1,3)
The Royal Bank of Scotland plc (3)
Coutts & Company (2, 3)
Ulster Bank Ireland Designated Activity Company (3)
NatWest Markets Plc
NatWest Markets N.V. (4)
The Royal Bank of Scotland International Limited (5)
Nature of business
Banking
Banking
Banking
Banking
Banking
Banking
Financial Institution
Country of incorporation and
principal area of operation
Great Britain
Great Britain
Great Britain
Republic of Ireland
Great Britain
Netherlands
Jersey
Group interest
100%
100%
100%
100%
100%
100%
100%
Notes:
(1) The company does not hold any of the preference shares in issue.
(2) Coutts & Company is incorporated with unlimited liability.
(3) Owned via NatWest Holdings Limited.
(4) Owned via NatWest Markets Plc.
(5) Owned via The Royal Bank of Scotland International (Holdings) Limited.
For full information on all related undertakings, refer to Note 12.
NatWest Group Annual Report and Accounts 2020
331
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
10 Analysis of changes in financing during the year
Share capital, share premium,
and paid-in equity
At 1 January
Issue of ordinary shares
Issue of Additional Tier 1 capital notes
Issue of subordinated liabilities
Issue of paid in equity
Redemption of subordinated liabilities
Interest on subordinated liabilities
Issue of MRELs
Maturity/redemption of MRELs
Interest on MRELs
Net cash inflow/(outflow) from financing
Ordinary shares issued
Effects of foreign exchange
Changes in fair value of subordinated liabilities/MRELs
Redeemed/reclassified
AT1 reclassification to subordinated liability
Loss on sale of MRELs and subordinated liabilities
Interest on subordinated liabilities/MRELs
At 31 December
2020
£m
2018
£m
17,235 17,123 16,899
2019
£m
Subordinated liabilities
2020
£m
7,763
2019
£m
8,059
2018
£m
7,977
MRELs
2020
£m
6,440
2019
£m
6,785
2018
£m
9,202
52
2,209
2,261
(1,277)
17
—
—
—
—
17
95
—
—
144
—
—
1,631
—
—
577
—
—
—
— (3,207)
(396)
—
(855)
(431)
(267)
(443)
144
(1,972)
(709)
(710)
80
—
—
—
(264)
268
—
403
(49)
—
—
—
—
—
—
—
—
—
—
1,178 (2,997)
(83)
(237)
(142) (3,317)
(1,285)
(35)
—
(261)
(46)
—
589
(95)
(3)
(2)
(142)
(147)
(275)
499
—
18,219 17,235 17,123
—
409
7,763
438
8,059
138
6,655
104
6,440
406
6,785
(264)
173
1,632
324
399
8,055
11 Directors’ and key management remuneration
Directors’ remuneration is disclosed in Note 30 on the consolidated accounts. The directors had no other reportable related party transactions or
balances with the company.
NatWest Group Annual Report and Accounts 2020
332
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
12 Related undertakings
Legal entities and activities at 31 December 2020
In accordance with the Companies Act 2006, the company’s related undertakings and the accounting treatment for each are listed below. All
undertakings are wholly-owned by the company or subsidiaries of the company and are consolidated by reason of contractual control (Section
1162(2) CA 2006), unless otherwise indicated. NatWest Group interest refers to ordinary shares of equal values and voting rights unless further
analysis is provided in the notes. Activities are classified in accordance with Annex I to the Capital Requirements Directive (“CRD IV”) and the
definitions in Article 4 of the Capital Requirements Regulation.
The following table details active related undertakings incorporated in the UK which are 100% owned by NatWest Group and fully consolidated
for accounting purposes
Entity name
280 Bishopsgate Finance Ltd
Adam & Company Investment Management Ltd
Caledonian Sleepers Rail Leasing Ltd
Care Homes 1 Ltd
Care Homes 2 Ltd
Care Homes 3 Ltd
Care Homes Holdings Ltd
Churchill Management Ltd
Coutts & Company
Coutts Finance Company
Desertlands Entertainment Ltd
Distant Planet Productions Ltd
Esme Loans Ltd
FreeAgent Central Ltd
FreeAgent Holdings Ltd
G L Trains Ltd
Gatehouse Way Developments Ltd
Helena Productions Ltd
KUC Properties Ltd
Land Options (West) Ltd
Lombard & Ulster Ltd
Lombard Business Finance Ltd
Lombard Business Leasing Ltd
Lombard Corporate Finance (6) Ltd
Lombard Corporate Finance (7) Ltd
Lombard Corporate Finance (11) Ltd
Lombard Corporate Finance (13) Ltd
Lombard Corporate Finance (15) Ltd
Lombard Corporate Finance (December 1) Ltd
Lombard Corporate Finance (December 3) Ltd
Lombard Corporate Finance (June 2) Ltd
Lombard Discount Ltd
Lombard Finance Ltd
Lombard Industrial Leasing Ltd
Lombard Initial Leasing Ltd
Lombard Lease Finance Ltd
Lombard Leasing Company Ltd
Lombard Leasing Contracts Ltd
Lombard Lessors Ltd
Lombard Maritime Ltd
Lombard North Central Leasing Ltd
Lombard North Central PLC
Lombard Property Facilities Ltd
Lombard Technology Services Ltd
Mettle Ventures Ltd
Nanny McPhee Productions Ltd
National Westminster Bank Plc
National Westminster Home Loans Ltd
National Westminster Properties No. 1 Ltd
NatWest Capital Finance Ltd
NatWest Corporate Investments
NatWest Holdings Ltd
NatWest Invoice Finance Ltd
NatWest Markets Plc
NatWest Markets Secretarial Services Ltd
NatWest Markets Secured Funding LLP
NatWest Property Investments Ltd
NatWest Trustee and Depositary Services Ltd
Activity
INV
BF
BF
BF
BF
BF
BF
BF
CI
BF
BF
BF
BF
SC
SC
BF
INV
BF
BF
INV
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
OTH
BF
CI
BF
SC
BF
BF
INV
OTH
CI
SC
BF
INV
INV
Regulatory
treatment
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
DE
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
FC
FC
FC
DE
FC
Notes
(6)
(11)
(2)
(6)
(6)
(6)
(6)
(2)
(50)
(50)
(6)
(6)
(6)
(7)
(7)
(2)
(2)
(6)
(1)
(1)
(33)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(2)
(6)
(6)
(6)
(6)
(2)
(6)
(6)
(6)
(6)
(6)
(6)
(2)
(6)
(6)
(6)
(36)
(6)
(47)
(6)
(6)
Entity name
NatWest Ventures Investments Ltd
Northern Isles Ferries Ltd
P of A Productions Ltd
Patalex Productions Ltd
Patalex III Productions Ltd
Patalex V Productions Ltd
Pittville Leasing Ltd
Premier Audit Company Ltd
Price Productions Ltd
Priority Sites Investments Ltd
Priority Sites Ltd
Property Venture Partners Ltd
R.B. Capital Leasing Ltd
R.B. Equipment Leasing Ltd
R.B. Leasing (April) Ltd
R.B. Leasing (September) Ltd
R.B. Leasing Company Ltd
R.B. Quadrangle Leasing Ltd
R.B.S. Special Investments Ltd
RB Investments 3 Ltd
RBOS (UK) Ltd
RBS AA Holdings (UK) Ltd
RBS Asset Finance Europe Ltd
RBS Asset Management (ACD) Ltd
RBS Asset Management Holdings
RBS Collective Investment Funds Ltd
RBS HG (UK) Ltd
RBS Invoice Finance Ltd
RBS Management Services (UK) Ltd
RBS Mezzanine Ltd
RBS Property Developments Ltd
RBS Property Ventures Investments Ltd
RBS SME Investments Ltd
RBSG Collective Investments Holdings Ltd
RBSG International Holdings Ltd
RBSM Capital Ltd
RBSSAF (2) Ltd
RBSSAF (6) Ltd
RBSSAF (7) Ltd
RBSSAF (8) Ltd
RBSSAF (12) Ltd
RBSSAF (25) Ltd
RoboScot Equity Ltd
Royal Bank Investments Ltd
Royal Bank Leasing Ltd
Royal Bank of Scotland (Industrial Leasing) Ltd
Royal Bank Ventures Investments Ltd
Royal Scot Leasing Ltd
RoyScot Trust Plc
SIG 1 Holdings Ltd
SIG Number 2 Ltd
The One Account Ltd
The Royal Bank of Scotland Group Independent
Financial Services Ltd
The Royal Bank of Scotland plc
Theobald Film Productions LLP
Ulster Bank Ltd
Ulster Bank Pension Trustees Ltd
Activity
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
INV
INV
BF
BF
BF
BF
BF
BF
BF
OTH
BF
BF
BF
BF
BF
BF
BF
BF
SC
BF
INV
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
CI
BF
CI
TR
Regulatory
treatment
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
Notes
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(1)
(6)
(6)
(6)
(6)
(1)
(6)
(6)
(6)
(6)
(6)
(6)
(50)
(50)
(11)
(6)
(6)
(6)
(1)
(36)
(1)
(2)
(11)
(1)
(1)
(6)
(6)
(6)
(6)
(6)
(6)
(1)
(1)
(1)
(1)
(1)
(1)
(6)
(1)
(1)
(6)
(25)
(36)
(6)
(33)
(33)
NatWest Group Annual Report and Accounts 2020
333
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
12 Related undertakings continued
Entity name
Voyager Leasing Ltd
Walton Lake Developments Ltd
West Register (Hotels Number 3) Ltd
Activity
BF
INV
INV
Regulatory
treatment
FC
DE
DE
Notes
(6)
(2)
(1)
Entity name
West Register (Property Investments) Ltd
West Register (Realisations) Ltd
Winchcombe Finance Ltd
Activity
BF
INV
BF
Regulatory
treatment
DE
DE
FC
Notes
(1)
(1)
(6)
The following table details active related undertakings incorporated outside the UK which are 100% owned by NatWest Group and fully
consolidated for accounting purposes
Entity name
Action Corporate Services Ltd
Airside Properties AB
Airside Properties ASP Denmark AS
Airside Properties Denmark AS
Alcover A.G.
Alternative Investment Fund B.V.
Arkivborgen KB
Artul Koy
Backsmedjan KB
BD Lagerhus AS
Bilfastighet i Akalla AB
Brödmagasinet KB
C.J. Fiduciaries Ltd
Candlelight Acquisition LLC
Coutts & Co (Cayman) Ltd
Coutts & Co Ltd
Coutts General Partner (Cayman) V Ltd
Eiendomsselskapet Apteno La AS
Eurohill 4 KB
Fab Ekenäs Formanshagen 4
Fastighets AB Flöjten I Norrköping
Fastighets AB Stockmakaren
Fastighets Aktiebolaget Sambiblioteket
Fastighetsbolaget Holma I Höör AB
Financial Asset Securities Corp.
First Active Ltd
Forskningshöjden KB
Förvaltningsbolaget Dalkyrkan KB
Fyrsate Fastighets AB
Gredelinen KB
Grinnhagen KB
Hatros 1 AS
Horrsta 4:38 KB
IR Fastighets AB
IR IndustriRenting AB
Kallebäck Institutfastigheter AB
Kastrup Commuter K/S
Kastrup Hangar 5 K/S
Kastrup V & L Building K/S
KB Eurohill
KB IR Gamlestaden
KB Lagermannen
KB Likriktaren
KEB Investors, L.P.
Keep SPV Ltd
Koy Lohjan Ojamonharjuntie 61
Koy Pennalan Johtotie 2
Koy Vantaan Rasti IV
Koy Espoon Entresse II
Koy Helsingin Mechelininkatu 1
Koy Helsingin Osmontie 34
Koy Helsingin Panuntie 11
Activity
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
CI
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
Regulatory
treatment
FC
FC
FC
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
Notes
(30)
(12)
(67)
(67)
(76)
(4)
(12)
(5)
(12)
(13)
(12)
(12)
(37)
(9)
(34)
(51)
(61)
(13)
(12)
(5)
(12)
(29)
(12)
(12)
(9)
(23)
(12)
(12)
(12)
(12)
(12)
(13)
(12)
(12)
(12)
(12)
(67)
(67)
(67)
(12)
(12)
(12)
(12)
(79)
(77)
(5)
(5)
(5)
(5)
(5)
(5)
(5)
Entity name
Koy Helsingin Panuntie 6
Koy Iisalmen Kihlavirta
Koy Jämsän Keskushovi
Koy Jasperintie 6
Koy Kokkolan Kaarlenportti Fab
Koy Kouvolan Oikeus ja Poliisitalo
Koy Millennium
Koy Nummelan Portti
Koy Nuolialan päiväkoti
Koy Peltolantie 27
Koy Puotikuja 2 Vaasa
Koy Raision Kihlakulma
Koy Ravattulan Kauppakeskus
Koy Tapiolan Louhi
Koy Vapaalan Service-Center
Läkten 1 KB
LerumsKrysset KB
Limstagården KB
Lombard Finance (CI) Ltd
Lothbury Insurance Company Ltd
Minster Corporate Services Ltd
Morar ICC Insurance Ltd
Narmovegen 455 AS
National Westminster International Holdings B.V.
NatWest Germany GmbH
NatWest Innovation Services Inc.
NatWest Markets Group Holdings Corporation
NatWest Markets N.V.
NatWest Markets Securities Inc.
NatWest Markets Securities Japan Ltd
NatWest Services (Switzerland) Ltd
Nordisk Renting AB
Nordisk Renting AS
Nordisk Renting Facilities Management AB
Nordisk Renting OY
Nordisk Specialinvest AB
Nordiska Strategifastigheter Holding AB
NWM Services India Private Ltd
Nybergflata 5 AS
R.B. Leasing BDA One Ltd
Random Properties Acquisition Corp. III
RBS (Gibraltar) Ltd
RBS AA Holdings (Netherlands) B.V.
RBS Acceptance Inc.
RBS Americas Property Corp.
RBS Asia Financial Services Ltd
RBS Asia Futures Ltd
RBS Assessoria Ltd
RBS Asset Management (Dublin) Ltd
RBS Commercial Funding Inc.
RBS Deutschland Holdings GmbH
Activity
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
OTH
OTH
BF
CI
INV
INV
SC
BF
BF
BF
BF
BF
BF
SC
BF
BF
INV
BF
BF
BF
SC
BF
BF
SC
BF
BF
BF
Regulatory
treatment
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
Notes
(5)
(5)
(5)
(10)
(5)
(5)
(5)
(5)
(5)
(10)
(5)
(5)
(5)
(5)
(5)
(12)
(12)
(12)
(37)
(78)
(30)
(69)
(21)
(73)
(22)
(9)
(9)
(4)
(9)
(58)
(51)
(12)
(13)
(29)
(5)
(12)
(12)
(41)
(13)
(16)
(9)
(72)
(4)
(9)
(9)
(58)
(58)
(68)
(64)
(9)
(22)
NatWest Group Annual Report and Accounts 2020
334
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
12 Related undertakings continued
Entity name
RBS Employment (Guernsey) Ltd
RBS Financial Products Inc.
RBS Group (Australia) Pty Ltd
RBS Holdings III (Australia) Pty Ltd
RBS Holdings N.V.
RBS Holdings USA Inc.
RBS Hollandsche N.V.
RBS International Depositary Services S.A.
RBS Investments (Ireland) Ltd
RBS Netherlands Holdings B.V.
RBS Nominees (Hong Kong) Ltd
RBS Nominees (Ireland) Ltd
RBS Nominees (Netherlands) B.V.
RBS Polish Financial Advisory Services Sp. Z o.o.
RBS Prime Services (India) Private Ltd
RBS Services India Private Ltd
RBS WCS Holding Company
Redlion Investments Ltd
Redshield Holdings Ltd
Ringdalveien 20 AS
Royhaven Secretaries Ltd
Activity
SC
BF
BF
BF
BF
BF
BF
CI
BF
BF
BF
BF
BF
BF
OTH
SC
BF
OTH
BF
BF
BF
Regulatory
treatment
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
Notes
(28)
(9)
(35)
(35)
(4)
(9)
(4)
(8)
(23)
(4)
(58)
(23)
(4)
(31)
(71)
(18)
(44)
(34)
(34)
(24)
(34)
Entity name
SFK Kommunfastigheter AB
Sjöklockan KB
Skinnarängen KB
Solbänken KB
Strand European Holdings AB
Svenskt Energikapital AB
Svenskt Fastighetskapital AB
Svenskt Fastighetskapital Holding AB
The RBS Group Ireland Retirement
Savings Trustee Ltd
The Royal Bank of Scotland International
(Holdings) Ltd
The Royal Bank of Scotland International Ltd
Tilba Ltd
Tygverkstaden 1 KB
Ulster Bank (Ireland) Holdings Unlimited Company
Ulster Bank Dublin Trust Company
Unlimited Company
Ulster Bank Holdings (ROI) Ltd
Ulster Bank Ireland Designated Activity Company
Ulster Bank Pension Trustees (RI) Ltd
Activity
BF
BF
BF
BF
BF
BF
BF
BF
Regulatory
treatment
FC
FC
FC
FC
FC
FC
FC
FC
Notes
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
TR
BF
CI
BF
BF
INV
TR
BF
CI
TR
DE
(23)
FC
FC
FC
FC
FC
FC
FC
FC
DE
(37)
(37)
(17)
(12)
(23)
(23)
(23)
(23)
(23)
The following table details related undertakings which are 100% owned by NatWest Group ownership but are not consolidated for accounting
purposes
Entity name
RBS Capital LP II
RBS Capital Trust II
RBS International Employees'
Pension Trustees Ltd
Activity
BF
BF
Regulatory
treatment
DE
DE
Notes
(44)
(43)
BF
DE
(49)
Entity name
RBS Retirement And Death Provision
Company Ltd
RBSG Capital Corp.
West Granite Homes Inc.
Activity
Regulatory
treatment
Notes
BF
BF
INV
DE
DE
DE
(75)
(9)
(52)
The following table details active related undertakings incorporated in the UK where NatWest Group ownership is less than 100%
Entity name
BGF Group Plc
Falcon Wharf Ltd
GWNW City Developments Ltd
Higher Broughton (GP) Ltd
Higher Broughton Partnership LP
Jaguar Cars Finance Ltd
JCB Finance (Leasing) Ltd
JCB Finance Ltd
Landpower Leasing Ltd
Accounting Regulatory Group
Activity
treatment
treatment
% Notes
Entity name
Accounting Regulatory Group
Activity
treatment
treatment
% Notes
BF
OTH
BF
BF
BF
BF
BF
BF
BF
EAA
EAJV
EAJV
EAA
EAA
FC
FC
FC
FC
PC
PC
DE
PC
DE
FC
FC
FC
FC
25
50
50
41
41
50
75
75
75
(14)
(63)
(63)
(62)
(66)
(6)
(60)
(60)
(60)
London Rail Leasing Ltd
Natwest Covered Bonds (LM) Ltd
Natwest Covered Bonds LLP
Natwest Markets Secured
Funding (LM) Ltd
Pollinate Networks Ltd
RBS Sempra Commodities LLP
Silvermere Holdings Ltd
Vizolution Ltd
BF
BF
BF
BF
OTH
BF
BF
OTH
EAJV
IA
FC
FC
EAA
FC
FC
EAA
PC
PC
FC
PC
DE
FC
FC
PC
50
20
73
20
30
51
95
5
(20)
(47)
(2)
(47)
(82)
(1)
(11)
(81)
NatWest Group Annual Report and Accounts 2020
335
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
12 Related undertakings continued
The following table details related undertakings incorporated outside the UK where NatWest Group ownership is less than 100%.
Entity name
Ardmore Securities No.1 DAC
Ardmore Securities No.2 DAC
Celtic Issuer Holdings Limited
Celtic Residential Irish Mortgage
Securitisation No 14 DAC
Celtic Residential Irish Mortgage
Securitisation No 15 DAC
CITIC Capital China
Mezzanine Ltd
Dunmore Securities No.1 DAC
Eris Finance S.R.L.
Förvaltningsbolaget
Klöverbacken Skola KB
Foundation Commercial
Property Ltd
German Public Sector
Finance B.V.
Herge Holding B.V.
Lunar Funding VIII Ltd
Lunar Luxembourg SA
Lunar Luxembourg Series 2019-04
Accounting Regulatory Group
Activity
BF
treatment
FC
treatment
DE
% Notes
(80)
0
BF
BF
BF
BF
BF
BF
BF
BF
FC
FC
FC
FC
IA
FC
IA
FC
DE
DE
DE
DE
PC
DE
PC
0
0
0
0
33
0
45
(80)
(86)
(86)
(86)
(42)
(80)
(19)
FC
51
(12)
OTH
EAJV
PC
50
(37)
BF
BF
BF
BF
BF
EAJV
EAJV
FC
FC
FC
PC
PC
DE
DE
DE
50
63
0
0
0
(40)
(85)
(84)
(84)
(84)
Entity name
Lunar Luxembourg Series 2019-05
Lunar Luxembourg Series 2019-06
Lunar Luxembourg Series 2020-01
Lunar Luxembourg Series 2020-02
Maja Finance S.R.L.
Nightingale CRE 2018-1 Ltd
Nightingale Project Finance
2019 1 Ltd
Nightingale Securities 2017-1 Ltd
Nightingale UK Corp 2020 2 Ltd
Natwest Secured Funding DAC
Optimus KB
Pharos Estates Ltd
Sempra Energy Trading LLC
Spring Allies Jersey Ltd
Thames Asset Global
Securitization No.1 Inc.
The Drive4Growth Company Ltd
Tulip Asset Purchase
Company B.V.
Wiöniowy Management sp. Z.o.o.
Accounting Regulatory Group
Activity
BF
BF
BF
BF
BF
BF
treatment
FC
FC
FC
FC
FC
FC
treatment
DE
DE
DE
DE
FC
DE
% Notes
(84)
0
(84)
0
(84)
0
(84)
0
(19)
98
(27)
0
BF
BF
BF
BF
BF
OTH
BF
BF
BF
OTH
BF
SC
FC
FC
FC
FC
FC
EAA
FC
EAA
FC
EAA
FC
EAA
DE
DE
DE
FC
FC
DE
FC
DE
FC
DE
FC
DE
0
0
0
0
51
49
51
49
0
20
0
25
(27)
(27)
(27)
(39)
(12)
(55)
(9)
(27)
(59)
(56)
(65)
(32)
The following table details related undertakings that are not active (actively being dissolved).
Accounting Regulatory Group
Entity name
AA Merchant Services B.V.
Arran Cards Funding Plc
Belfast Bankers' Clearing Company Ltd
Celtic Residential Irish Mortgage
Securitisation No 09 Plc
Celtic Residential Irish Mortgage
Securitisation No 10 Plc
Celtic Residential Irish Mortgage
Securitisation No 11 Plc
Coutts & Co Trustees (Suisse) S.A.
CTB Ltd
Euro Sales Finance Ltd
First Active Holdings Ltd
First Active Insurances Services Ltd
First Active Investments No. 4 Ltd
Isobel AssetCo Ltd
Isobel EquityCo Ltd
Isobel HoldCo Ltd
Isobel Intermediate HoldCo Ltd
Isobel Loan Capital Ltd
Isobel Mezzanine Borrower Ltd
treatment
FC
FC
EAA
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
treatment
% Notes
(4)
(53)
(3)
FC 100
0
FC
25
DE
DE
DE
0
0
0
DE
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
75
FC
75
FC
75
FC
75
FC
75
FC
75
FC
(87)
(87)
(87)
(54)
(57)
(6)
(23)
(88)
(88)
(46)
(46)
(46)
(46)
(46)
(46)
Entity name
Lombard Ireland Group
Holdings Unlimited Company
Lombard Ireland Ltd
Lombard Manx Leasing Ltd
Lombard Manx Ltd
NatWest Nominees Ltd
Nevis Derivatives No. 3 LLP
RBS Asia Holdings B.V.
RBS Asset Management Ltd
RBS European Investments SARL
RBS Investment Ltd
Royal Bank Invoice Finance Ltd
RoyScot Financial Services Ltd
Safetosign Ltd
Style Financial Services Ltd
The Royal Bank of Scotland Invoice
Discounting Ltd
Total Capital Finance Ltd
UB SIG (ROI) Ltd
Ulster Bank Group Treasury Ltd
West Register Hotels (Holdings) Ltd
Accounting Regulatory Group
treatment
treatment
% Notes
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
(88)
(88)
(17)
(17)
(2)
(53)
(4)
(6)
(70)
(1)
(6)
(6)
(6)
(25)
(6)
(2)
(23)
(88)
(25)
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
NatWest Group Annual Report and Accounts 2020
336
Parent company financial statements and notes
12 Related undertakings continued
The following table details related undertakings that are dormant
Accounting Regulatory Group
Entity name
Adam & Company (Nominees) Ltd
Atlas Nominees Ltd
British Overseas Bank Nominees Ltd
Buchanan Holdings Ltd
Custom House Docks Basement
Management No. 2 Ltd
Dixon Vehicle Sales Ltd
Dunfly Trustee Ltd
FIT Nominee 2 Ltd
FIT Nominee Ltd
Freehold Managers (Nominees) Ltd
HPUT A Ltd
HPUT B Ltd
ITB1 Ltd
ITB2 Ltd
JCB Finance Pension Ltd
Marigold Nominees Ltd
Mulcaster Street Nominees Ltd
N.C. Head Office Nominees Ltd
National Westminster Bank Nominees
(Jersey) Ltd
NatWest FIS Nominees Ltd
treatment
FC
FC
FC
FC
EAA
FC
FC
FC
FC
FC
NC
NC
FC
FC
FC
FC
FC
FC
FC
FC
treatment
% Notes
(25)
(58)
(6)
(2)
FC 100
FC 100
FC 100
FC 100
DE
25
FC 100
FC 100
FC 100
FC 100
FC 100
100
DE
DE
100
FC 100
FC 100
DE
88
FC 100
FC 100
FC 100
FC 100
FC 100
(45)
(2)
(2)
(6)
(6)
(6)
(6)
(6)
(1)
(1)
(33)
(6)
(37)
(1)
(74)
(6)
Accounting Regulatory Group
Entity name
NatWest Group Secretarial Services Ltd
NatWest Pension Trustee Ltd
NatWest PEP Nominees Ltd
Nextlinks Ltd
Nordisk Renting A/S
Nordisk Renting HB
Project & Export Finance (Nominees) Ltd
R.B. Leasing (March) Ltd
RBOS Nominees Ltd
RBS Investment Executive Ltd
RBS Retirement Savings Trustee Ltd
RBSG Collective Investments
Nominees Ltd
Sixty Seven Nominees Ltd
Strand Nominees Ltd
Syndicate Nominees Ltd
TDS Nominee Company Ltd
The Royal Bank of Scotland (1727) Ltd
The Royal Bank of Scotland Group Ltd
W G T C Nominees Ltd
Williams & Glyn's Bank Ltd
treatment
FC
NC
FC
FC
FC
FC
FC
FC
FC
NC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
treatment
% Notes
(1)
(6)
(2)
(6)
(26)
(12)
(2)
(6)
(6)
(1)
(2)
FC 100
DE
100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
DE
100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
FC 100
(11)
(2)
(50)
(2)
(25)
(1)
(2)
(6)
(6)
The following table details related undertakings that are in administration.
Entity name
Loot Financial Services Ltd
Activity
OTH
treatment
EAA
treatment
PC
% Notes
(83)
26
Entity name
Uniconn Ltd
Accounting Regulatory Group
Accounting Regulatory Group
Activity
OTH
treatment
EAA
treatment
DE
% Notes
(38)
30
The following table details overseas branches of NatWest Group
Subsidiary
Coutts & Co
National Westminster Bank Plc
Geographic location
Hong Kong
Germany
Germany, Hong Kong, Japan, Singapore
Turkey, United Arab Emirates
NatWest Markets Plc
Subsidiary
NatWest Markets N.V.
The Royal Bank of Scotland
International Ltd
Geographic location
France, Germany, Hong Kong, Italy
Republic of Ireland, Spain, Sweden
United Kingdom
Gibraltar, Guernsey, Isle of Man
Luxembourg, United Kingdom
Banking and financial institution
Credit institution
Investment (shares or property) holding company
Service company
Trustee
Key:
BF
CI
INV
SC
TR
OTH Other
DE
FC
PC
EAA
EAJV Equity accounting – Joint venture
Investment accounting
IA
Not consolidated
NC
Deconsolidated
Full consolidation
Pro-rata consolidation
Equity accounting – Associate
Notes Registered addresses
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
RBS Gogarburn, 175 Glasgow Road, Edinburgh, EH12 1HQ, Scotland
1 Princes Street, London, EC2R 8BP, England
Scottish Provident Building 7 Donegall Square West Belfast BT1 6JH, Northern Ireland
Claude Debussylaan 94, 1082 MD, Amsterdam
c/o Epicenter, Mikonkatu 9, 6th Floor, 00100, Helsinki
250 Bishopsgate, London, EC2M 4AA, England
One Edinburgh Quay, 133 Fountainbridge, Edinburgh, EH3 9QG, Scotland
40, Avenue J.F Kennedy, Kirchberg L 1855
251, Little Falls Drive, Wilmington, Delaware, 19808
c/o Nordisk Renting Oy, Mikonkatu 9, 00100 Helsinki
6-8 George Street, Edinburgh, EH2 2PF, Scotland
c/o Nordisk Renting AB, Jakobsbergsgatan 13, 8 storey, Box 14044, SE-111 44, Stockholm
Hieronymus Heyerdahlsgate 1, Postboks 2020 Vika, 0125, Oslo
13-15 York Buildings, London, WC2N 6JU, England
24/26 City Quay, Dublin 2, D02 NY19
Victoria Place, 5th Floor, 31 Victoria Street, Hamilton, HM 10
Country of incorporation
UK
UK
UK
Netherlands
Finland
UK
UK
Luxembourg
USA
Finland
UK
Sweden
Norway
UK
RoI
Bermuda
NatWest Group Annual Report and Accounts 2020
337
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Parent company financial statements and notes
12 Related undertakings continued
Notes Registered addresses
2 Athol Street, Douglas, IM99 1AN
(17)
6th Floor, Building 2, Tower A, GIL IT/ITES SEZ, Candor TechSpace, Sector 21, Dundahera, Gurugram, Haryana, 122016
(18)
Via Vittorio Alfieri 1, Conegliano TV, IT-TN 31015
(19)
99 Queen Victoria Street, London, EC4V 4EH, England
(20)
c/o Advokatfirmaet Wirsholm AS, Dokkveien 1, NO-0250, Oslo
(21)
Roßmarkt 10, Frankfurt am Main, 60311
(22)
Ulster Bank Group Centre, George's Quay, Dublin 2, D02 VR98
(23)
c/o Nordisk Renting AS, 9 Etasje, Klingenberggata 7, NO-0161, Oslo
(24)
24/25 St Andrew Square, Edinburgh, Midlothian, EH2 1AF, Scotland
(25)
c/o Adv Jan-Erik Svensson, HC Andersens Boulevard 12, Kopenhaum V, 1553
(26)
44 Esplanade, St Helier, JE4 9WG
(27)
Regency Court, Glategny Esplanade, St Peter Port, GY1 3AP
(28)
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
(29)
(30)
Hudsun Chambers, PO Box 986, Road Town, Tortola
(31) Wiśniowy Business Park, ul. 1-go Sierpnia 8A, Warsaw, 02-134
(32) Wisniowy Business Park Ul Ilzecka 26, Building E, Warsaw, 02-135
(33)
(34)
(35)
(36)
(37)
(38)
(39)
(40)
(41)
(42)
(43)
(44)
(45)
(46)
(47)
(48)
(49)
(50)
(51)
(52)
(53)
(54)
(55)
(56)
(57)
(58)
(59)
(60)
(61)
(62)
(63)
(64)
(65)
(66)
(67)
(68)
(69)
(70)
(71)
(72)
(73)
(74)
(75)
(76)
(77)
(78)
(79)
(80)
(81)
(82)
(83)
(84)
(85)
(86)
(87)
(88)
11-16 Donegall Square East, Belfast, Co Antrim, BT1 5UB, Northern Ireland
c/o Estera Trust (Cayman) Ltd, Clifton House, 75 Fort Street, PO Box 1350, Grand Cayman, KY1-1108
Ashurst L26, 181 William Street, Melbourne, VIC, 3000
36 St Andrew Square, Edinburgh, EH2 2YB, Scotland
Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
4 Atlantic Quay, 70 York Street, Glasgow, G2 8JX, Scotland
5 Harbourmaster Place, Dublin 1, D01 E7E8
De entree 99 -197, 1101HE Amsterdam Zuidoost
c/o CE Serviced Offices Pvt Ltd, Level 1, Tower A, Building No 10, Phase III, DLF Cyber City, Gurgaon, Haryana, 122002
Boundary Hall, Cricket Square, 171 Elgin Avenue, George Town, Grand Cayman, KY1-1104
301, Bellevue Parkway, 3rd Floor, Wilmington, DE, 19809
1209, Orange Street, Wilmington, New Castle County, DE, 19801
First Floor, 1 Exchange Place, Dublin 1, D01 R8W8
40 Berkeley Square, London, W1J 5AL, England
1 Bartholomew Lane London EC2N 2AX, England
Riverside One, Sir John Rogersons Quay, Dublin 2, D02 X576
23/25 Broad Street, St Helier, JE4 8ND
440 Strand, London, WC2R OQS, England
Lerchenstrasse 18, Zurich, CH-8022
200, Bellevue Parkway, Suite 210, Wilmington, DE 19809
35 Great St Helen's, London, EC3A 6AP, England
c/o Regus Rue du Rhone Sarl, Rue du Rhone 14, 1204, Geneva
24 Demostheni Severi, 1st Floor, Nicosia, 1080
c/o Denis Crowley & Co Chartered Accountants, Unit 6 Riverside Grove, Co. Cork, P43 W221
Suite 200B, 2nd Floor, Centre of Commerce, One Bay Street, PO Box N-3944, Nassau
Level 54, Hopewell Centre, 183 Queen's Road East
114 West 47th Street, New York, 10036
The Mill, High Street, Rocester, Staffordshire, ST14 5JW, England
c/o Maples Corporate Services Ltd, PO Box 309, 121 South Church Street, George Town, Grand Cayman, KY1-1104
3rd Floor, 1 St Ann Street, Manchester, M2 7LR, England
Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR, England
One Dockland Central, Guild Street, IFSC, Dublin 1, D01 E4X0
Claude Debussylaan 24, 1082 MD, Amsterdam
Cornwall Buildings, 45-51 Newhall Street, Birmingham, West Midlands, B3 3QR, England
c/o Visma Services Danmark A/S, Lyskaer 3C-3D, 2730 Herlev, Hjortespring
254, 13th Floor, Rua Boa Vista, Sao Paulo, 01014-907
PO Box 384, The Albany, South Esplanade, St Peter Port, GY1 4NF
46, Avenue John F. Kennedy, L-1855
12/14 Veer Nariman Road, Brady House 4th floor, Fort, Mumbai 400001
Madison Building, Midtown, Queensway
Kokermolen 16, 3994 Dh Houten
16 Library Place, St. Helier, JE4 8NH
PO Box 236, First Island House, Peter Street, St Helier, JE4 8SG
Tirolerweg 8, Zug, CH- 6300
66-72, Gaspé House, Esplanade, St Helier, JE2 3QT
PO Box 230, Heritage Hall, Le Marchant Street, St Peter Port, GY1 4JH
Clarendon House, Two Church Street, Suite 104, Reid Street, Hamilton, HM 11
3rd Floor, Fleming Court, Fleming's Place, Dublin 4, D04 N4X9
Office Block A, Bay Studios Business Park, Fabian Way, Swansea, SA1 8QB, Wales
The Chestnuts Brewers End, Takeley, Bishop's Stortford, CM22 6QJ, England
Smith and Williamson Llp 25 Moorgate London EC2R 6AY, England
Grand Pavilion Commercial Centre, 802 West Bay Road, P.O. Box 31119,
Verlengde Poolseweg 16, Breda, 4818CL
Block A , George's Quay Plaza, George's Quay, Dublin 2, Dublin
Pinnacle 2, Eastpoint Business Park, Dublin 3, Dublin, D03 P580
13-18 City Quay, Dublin 2, Dublin, D02 ED70
Country of incorporation
Isle Of Man
India
Italy
UK
Norway
Germany
RoI
Norway
UK
Denmark
Jersey
Guernsey
Sweden
British Virgin Islands
Poland
Poland
UK
Cayman Islands
Australia
UK
Jersey
UK
RoI
Netherlands
India
Cayman Islands
USA
USA
RoI
UK
UK
RoI
Jersey
UK
Switzerland
USA
UK
Switzerland
Cyprus
RoI
Bahamas
Hong Kong
USA
UK
Cayman Islands
UK
UK
RoI
Netherlands
UK
Denmark
Brazil
Guernsey
Luxembourg
India
Gibraltar
Netherlands
Jersey
Jersey
Switzerland
Jersey
Guernsey
Bermuda
RoI
UK
UK
UK
Cayman Islands
Netherlands
RoI
RoI
RoI
NatWest Group Annual Report and Accounts 2020
338
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Non-IFRS financial measures
As described in the Accounting policies, NatWest Group prepares its financial statements in accordance with the basis set out in the accounting
policies, page 264 which constitutes a body of generally accepted accounting principles (GAAP). This document contains a number of adjusted
or alternative performance measures, also known as non-GAAP or non-IFRS performance measures. These measures are adjusted for certain
items which management believe are not representative of the underlying performance of the business and which distort period-on-period
comparison. The non-IFRS measures provide users of the financial statements with a consistent basis for comparing business performance
between financial periods and information on elements of performance that are one-off in nature. The non-IFRS measures also include the
calculation of metrics that are used throughout the banking industry. These non-IFRS measures are not measures within the scope of IFRS and
are not a substitute for IFRS measures. These measures include:
Measure
NatWest Group
return on tangible
equity
Segmental return
on equity
Operating
expenses analysis
– management
view
Cost:income ratio
Commentary –
adjusted
periodically for
specific items
Net lending in the
retail and
commercial
business
Bank net interest
margin (NIM)
Basis of preparation
Profit for the period attributable to ordinary shareholders divided by average tangible
equity. Average tangible equity is total equity less intangible assets and other owners’
equity.
Segmental operating profit adjusted for preference share dividends and tax divided by
average notional equity, allocated at an operating segment specific rate, of the period
average segmental risk-weighted assets incorporating the effect of capital deductions
(RWAes).
The management analysis of strategic disposals in other income and operating expenses
shows strategic costs and litigation and conduct costs in separate lines. These amounts
are included in staff, premises and equipment and other administrative expenses in the
statutory analysis.
Total operating expenses less operating lease depreciation, divided by total income less
operating lease depreciation.
NatWest Group and segmental business performance commentary have been adjusted for
the impact of specific items such as notable items, transfers, operating lease depreciation,
strategic and litigation and conduct costs.
Comprises customer loans in the Retail Banking, Ulster Bank RoI, Commercial Banking,
Private Banking and RBSI operating segments.
Additional analysis or
reconciliation
Table I
Table I
Table II
Table III
Notable items within
income – page 87,
Transfers – pages 90
and 93, Operating
lease depreciation,
Strategic costs and
litigation and conduct
costs – page 86
Pages 13 and 19
Net interest income of the banking business less the NatWest Markets (NWM) element as
a percentage of interest-earning assets of the banking business less the NWM element.
Table IV
Performance metrics not defined under IFRS(1)
Measure
Loan:deposit ratio
Tangible net asset
value (TNAV)
NIM
Funded assets
ECL loss rate
Assets under
management and
administration
(AUMA)
Third party
customer asset
rate
Third party
customer funding
rate
Basis of preparation
Net customer loans held at amortised cost divided by total customer deposits.
Tangible equity divided by the number of ordinary shares in issue. Tangible equity is
ordinary shareholders’ interest less intangible assets.
Net interest income as a percentage of interest-earning assets.
Total assets less derivatives.
The annualised loan impairment charge divided by gross customer loans.
Total AUMA comprises both assets under management (AUMs) and assets under
administration (AUAs) managed within the Private Banking franchise. AUMs comprise
assets under management, assets under custody and investment cash relating to Private
Banking customers. AUAs are managed by Private Banking on behalf of Retail Banking
and RBSI and a management fee is received in respect of providing this service.
Third party customer asset rate is calculated as interest receivable on
third-party loans to customers as a percentage of third-party loans to customers only.
This excludes intragroup items, loans to banks and liquid asset portfolios, which are
included for the calculation of net interest margin.
Third party customer funding rate is calculated as interest payable on third-party customer
deposits as a percentage of third-party customer deposits, including interest bearing and
non-interest bearing customer deposits. This excludes intragroup items, bank deposits and
debt securities in issue.
Additional analysis or
reconciliation
Table V
Page 89
Pages 90 to 95
Pages 91 and 95
Page 88
Page 93
Page 86
Page 86
Note:
(1) Metric based on GAAP measures, included as not defined under IFRS and reported for compliance with ESMA adjusted performance measure rules.
NatWest Group Annual Report and Accounts 2020
339
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Non-IFRS financial measures
I. Return on tangible equity
NatWest Group return on tangible equity
(Loss)/profit attributable to ordinary shareholders (£m)
Average total equity (£m)
Adjustment for other owners equity and intangibles (£m)
Adjusted total tangible equity (£m)
Return on tangible equity (%)
Year ended 31 December 2020
Operating profit/(loss) (£m)
Preference share cost allocation (£m)
Adjustment for tax (£m)
Adjusted attributable profit/(loss) (£m)
Average RWAe (£bn)
Equity factor
RWAe applying equity factor (£bn)
Return on equity
Year ended 31 December 2019
Operating profit/(loss) (£m)
Adjustment for tax (£m)
Preference share cost allocation (£m)
Adjustment for Alawwal bank merger gain (£m)
Adjusted attributable profit/(loss) (£m)
Average RWAe (£bn)
Equity factor
RWAe applying equity factor (£bn)
Return on equity
Year ended 31 December 2018
Operating profit/(loss) (£m)
Adjustment for tax (£m)
Preference share cost allocation (£m)
Adjusted attributable profit/(loss) (£m)
Average RWAe (£bn)
Equity factor
RWAe applying equity factor (£bn)
Return on equity
Year ended or as at
31 December
2020
(753)
43,774
(11,872)
31,902
(2.4%)
31 December
2019
3,133
45,160
(11,960)
33,200
9.4%
Private
Banking
208
(22)
(52)
134
10.4
12.5%
1.3
10.3%
297
(83)
(18)
—
196
9.8
13.0%
1.3
15.4%
303
(85)
(23)
195
9.4
13.5%
1.3
15.4%
RBS
International
99
(20)
(11)
68
7.0
16.0%
1.1
6.1%
344
(48)
(11)
—
285
6.9
16.0%
1.1
25.7%
336
(47)
(18)
271
7.0
16.0%
1.1
24.4%
NatWest
Markets
(227)
(68)
83
(212)
37.3
15.0%
5.6
(3.8%)
(25)
7
(64)
(150)
(232)
48.0
15.0%
7.2
(3.2%)
(70)
20
(108)
(158)
53.8
15.0%
8.1
(2.0%)
Retail
Banking
849
(88)
(213)
548
37.2
14.5%
5.4
10.2%
855
(236)
(74)
—
545
37.7
15.0%
5.7
9.6%
1,848
(510)
(80)
1,258
34.0
15.0%
5.1
24.7%
Ulster
Bank
RoI
(226)
—
—
(226)
12.4
15.5%
1.9
(11.7%)
49
—
—
—
49
14.0
15.0%
2.1
2.3%
12
—
—
12
17.0
14.0%
2.4
0.5%
Commercial
Banking
(399)
(153)
155
(397)
76.4
11.5%
8.8
(4.5%)
1,327
(372)
(163)
—
792
78.2
12.0%
9.4
8.4%
1,968
(549)
(188)
1,231
85.0
12.0%
10.2
12.1%
NatWest Group Annual Report and Accounts 2020
340
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Non-IFRS financial measures
II. Operating expenses analysis
Statutory analysis (1,2)
Operating expenses
Staff costs
Premises and equipment
Other administrative expenses
Depreciation and amortisation
Impairment of other intangible assets
Total operating expenses
Non-statutory analysis
Operating expenses
Staff expenses
Premises and equipment
Other administrative expenses
Depreciation and amortisation
Impairment of other intangible assets
Total
Operating expenses
Staff expenses
Premises and equipment
Other administrative expenses
Depreciation and amortisation
Impairment of other intangible assets
Total
Year ended
31 December 2020
Litigation
and conduct
costs
—
—
113
—
—
113
Other
expenses
3,461
990
1,535
791
2
6,779
Strategic
costs
462
233
197
114
7
1,013
Statutory
operating
expenses
3,923
1,223
1,845
905
9
7,905
31 December
2020
£m
3,923
1,223
1,845
905
9
7,905
Year ended
31 December
2019
£m
4,018
1,259
2,828
1,176
44
9,325
31 December
2018
£m
4,122
1,383
3,372
731
37
9,645
Strategic
costs
451
239
295
352
44
1,381
31 December 2019
Litigation
and conduct
costs
—
—
895
—
—
895
Other
expenses
3,567
1,020
1,638
824
—
7,049
31 December 2018
Litigation
Strategic
and conduct
costs
473
142
303
86
—
1,004
costs
—
—
1,282
—
—
1,282
Other
expenses
3,649
1,241
1,787
645
37
7,359
Statutory
operating
expenses
4,018
1,259
2,828
1,176
44
9,325
Statutory
operating
expenses
4,122
1,383
3,372
731
37
9,645
Notes:
(1) On a statutory, or GAAP, basis, strategic costs are included within staff, premises and equipment, depreciation and amortisation, impairment of other intangible
assets and other administrative expenses. Strategic costs relate to restructuring provisions, related costs and projects that are transformational in nature.
(2) On a statutory, or GAAP, basis, litigation and conduct costs are included within other administrative expenses.
III. Cost:income ratio
Year ended 31 December 2020
Operating expenses
Operating lease depreciation
Adjusted operating expenses
Total income
Operating lease depreciation
Adjusted total income
Cost:income ratio
Year ended 31 December 2019
Operating expenses
Operating lease depreciation
Adjusted operating expenses
Total income
Operating lease depreciation
Adjusted total income
Cost:income ratio
Year ended 31 December 2018
Operating expenses
Operating lease depreciation
Adjusted operating expenses
Total income
Operating lease depreciation
Adjusted total income
Cost:income ratio
Retail
Banking
£m
(2,540)
—
(2,540)
4,181
—
4,181
60.8%
(3,618)
—
(3,618)
4,866
—
4,866
74.4%
(2,867)
—
(2,867)
5,054
—
5,054
56.7%
Ulster
Bank
RoI
£m
(486)
—
(486)
510
—
510
95.3%
(552)
—
(552)
567
—
567
97.4%
(583)
—
(583)
610
—
610
95.6%
Commercial
Banking
£m
(2,430)
145
(2,285)
3,958
(145)
3,813
59.9%
(2,600)
138
(2,462)
4,318
(138)
4,180
58.9%
(2,487)
121
(2,366)
4,602
(121)
4,481
52.8%
Private
Banking
£m
(455)
—
(455)
763
—
763
59.6%
(486)
—
(486)
777
—
777
62.5%
(478)
—
(478)
775
—
775
61.7%
RBS
International
£m
(291)
—
(291)
497
—
497
58.6%
NatWest Central items
& other
Markets
£m
£m
(393)
(1,310)
—
—
(393)
(1,310)
(236)
1,123
—
—
(236)
1,123
nm
116.7%
(264)
—
(264)
610
—
610
43.3%
(260)
—
(260)
594
—
594
43.8%
(1,418)
—
(1,418)
1,342
—
1,342
105.7%
(1,604)
—
(1,604)
1,442
—
1,442
111.2%
(387)
—
(387)
1,773
—
1,773
nm
(1,366)
—
(1,366)
325
—
325
nm
NatWest
Group
£m
(7,905)
145
(7,760)
10,796
(145)
10,651
72.9%
(9,325)
138
(9,187)
14,253
(138)
14,115
65.1%
(9,645)
121
(9,524)
13,402
(121)
13,281
71.7%
NatWest Group Annual Report and Accounts 2020
341
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
Non-IFRS financial measures
IV. Net interest margin
NatWest Group net interest income
Less: NWM net interest income
Net interest income excluding NWM
Average interest earning assets (IEA)
Less: NWM average IEA
Bank average IEA excluding NWM
Net interest margin
Bank net interest margin (NatWest Group NIM excluding NWM)
V. Loan:deposit ratio
Loans to customers - amortised cost
Customer deposits
Loan:deposit ratio (%)
Year ended
31 December
31 December
31 December
2020
£m
7,749
57
7,806
493,471
37,929
455,542
1.57%
1.71%
2019
£m
8,047
188
8,235
448,556
35,444
413,112
1.79%
1.99%
As at
2018
£m
8,656
(112)
8,544
436,957
27,851
409,106
1.98%
2.09%
31 December
31 December
31 December
2020
£m
360,544
431,739
84%
2019
£m
326,947
369,247
89%
2018
£m
305,089
360,914
85%
NatWest Group Annual Report and Accounts 2020
342
i
i
F
n
a
n
c
a
l
s
t
a
t
e
m
e
n
t
s
The Capital Requirements (Country-by-Country Reporting) Regulations (Audited)
This report has been prepared for NatWest Group to comply with the Capital Requirements (Country by Country Reporting) Regulations 2013
which implement Article 89 of the Capital Requirements Directive IV.
This report shows the income, profit/(loss) before tax, tax paid/(received), average and spot employee numbers on a full-time equivalent basis
for the entities located in the countries in which we operate.
Country
Each subsidiary or branch is allocated to the country in which it is resident for tax purposes. The data is consolidated for all the subsidiaries and
branches allocated to each country.
Income and profit/(loss) before tax
Income and profit/(loss) totals are reported on page 275 within the Geographical segments table.
Tax paid/(received)
Tax paid/(received) disclosed under CRD IV relates to corporate tax.
Corporate tax paid represents net cash taxes paid to/(received) from the tax authorities in each jurisdiction.
Corporate tax paid is reported on a cash basis as opposed to an accounting basis and therefore does not necessarily have a direct correlation
to the reported profits or losses arising in the year.
Full time equivalent employees (“FTEs”)
FTEs are allocated to the country in which they are primarily based for the performance of their employment duties. The figures disclosed
represent the average number of FTEs, including temporary staff, in each country during the period. The FTEs, including temporary staff as at
the year end 31 December 2020, have been added for completeness.
Public subsidies received
No public subsidies were received during the period.
NatWest Group Annual Report and Accounts 2020
343
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
The Capital Requirements (Country-by-Country Reporting) Regulations (Audited)
NatWest Group Country by Country tax breakdown 2020
(Loss)/profit
Tax paid/
Average FTE
FTE including temporary
Income (1)
before tax (1)
(received)
including
staff as at the year end
£m
£m
£m
temporary staff
31 December 2020
Headcount
Country
UK
Guernsey
Isle of Man
Jersey
UK Region
Finland
France
Germany
Gibraltar
Greece
Ireland
Italy
Luxembourg
Netherlands
Norway
Poland (4)
Spain
Sweden
Switzerland (4)
Turkey
Europe Region
USA
US Region
Hong Kong
India (4)
Japan
Singapore
Taiwan
Asia Pacific Region
Saudi Arabia (3)
United Arab Emirates
Middle East Region
UK Region
Europe Region
US Region
Rest of World Region
Global Total
9,431
92
59
165
9,747
6
20
13
28
—
512
9
16
77
3
1
9
36
3
2
735
181
181
13
28
23
68
1
133
—
—
—
9,747
735
181
133
10,796
(223)
42
4
(16)
(193)
6
2
1
9
—
(235)
2
1
7
2
5
—
21
18
—
(161)
(85)
(85)
—
52
5
30
2
89
—
(1)
(1)
(193)
(161)
(85)
88
(351)
113
12
3
15
143
2
—
(1)
4
1
1
1
1
—
2
—
1
(2)
11
3
24
(1)
(1)
—
24
1
—
(1)
24
24
—
24
143
24
(1)
48
214
42,748
100
405
624
43,877
3
31
39
67
1
2,223
16
57
99
—
1,216
18
36
273
2
4,081
378
378
27
13,321
41
135
—
13,524
—
—
—
43,877
4,081
378
13,524
61,860
41,185
92
382
616
42,275
2
32
43
60
1
2,153
16
62
96
—
1,184
18
36
270
2
3,975
326
326
24
13,164
39
112
—
13,339
—
—
—
42,275
3,975
326
13,339
59,915
Notes:
(1) A full list of NatWest Group subsidiaries' names, nature of activities and geographical locations is available at Note 12 of the parent company accounts.
(2) A list of the principal subsidiaries in each jurisdiction and the nature of their activities is available at Note 9 of the parent company accounts.
(3) Tax paid of £24 million in Saudi Arabia is due to capital gains tax arising on the merger of Alawwal bank with SABB during 2019.
(4)
(5) The amounts shown above are presented to the nearest million and as a result any amounts less than £0.5 million have been rounded to zero.
Income excludes internal service fee income which has been calculated on a cost plus mark-up basis.
NatWest Group Annual Report and Accounts 2020
344
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
Principal Risks and Uncertainties
Set out below are certain risk factors that
could adversely affect NatWest Group’s future
results, its financial condition and prospects
and cause them to be materially different from
what is forecast or expected, and directly or
indirectly impact the value of its securities in
issue. These risk factors are broadly
categorised and should be read in conjunction
with other sections of this annual report,
including the forward-looking statements
section, the strategic report and the risk and
capital management section. They should not
be regarded as a complete and
comprehensive statement of all potential risks
and uncertainties facing NatWest Group. The
current COVID-19 pandemic may exacerbate
any of the risks described below.
Risks relating to the COVID-19 pandemic
The effects of the COVID-19 pandemic on
the UK, global economies and financial
markets, and NatWest Group’s customers,
as well as its competitive environment may
continue to have a material adverse effect
on NatWest Group’s business, results of
operations and outlook.
In March 2020, the World Health Organization
declared the spread of the COVID-19 virus a
pandemic. Since then, many countries,
including the UK (NatWest Group’s most
significant market) have at times imposed
strict social distancing measures, restrictions
on non-essential activities and travel
quarantines, in an attempt to slow the spread
and reduce the impact of the COVID-19
pandemic.
The UK economy, as well as most countries,
went into recession in 2020 as measures
were introduced to reduce the spread of the
virus. UK economic output fell again in
November 2020, according to estimates from
the Office for National Statistics, as many
restrictions were re-introduced towards the
end of 2020 and at the start of 2021. The
COVID-19 pandemic has caused significant
reductions in levels of personal and
commercial activity, reductions in consumer
spending, increased levels of corporate debt
and, for some customers, personal debt,
increased unemployment and significant
market volatility in asset prices, interest rates
and foreign exchange rates. It has also
caused physical disruption and slow-down to
global supply chains and working practices, all
of which have affected NatWest Group’s
customers. NatWest Group has significant
exposures to many of the commercial sectors
economically impacted by the COVID-19
pandemic, including property, retail, leisure
and travel.
Further waves of infection may result in
further restrictions in affected countries and
regions. While vaccine treatment is currently
being deployed, the pace of deployment and
ultimate effectiveness is uncertain, and
vaccines may fail to achieve immunisation
that is significant within the population.
Therefore, significant uncertainties remain as
to how long the COVID-19 pandemic will last.
Even when restrictions are relaxed, they may
be re-imposed, sometimes at short notice if
either immunisation is insufficient or new
strains of the COVID-19 virus or other
diseases develop into new epidemics or
pandemics.
Significant uncertainties continue as to the
extent of the economic contraction and the
path and length of time required to achieve
economic recovery.
In response to the COVID-19 pandemic,
central banks, governments, regulators and
legislatures in the UK and elsewhere have
announced historic levels of support and
various schemes for impacted businesses and
individuals including forms of financial
assistance and legal and regulatory initiatives,
including further reductions in interest rates.
Whether or not these measures effectively
mitigate the negative impacts of the COVID-
19 pandemic on NatWest Group, some of
these measures, or further measures, such as
negative interest rates, may also have a
material adverse effect on NatWest Group’s
business and performance. It is uncertain as
to how long the above-mentioned financial
assistance and legal and regulatory initiatives
may last, how they may evolve in the future or
how consumers and businesses may react to
such initiatives. NatWest Group’s consumer
customers and corporate clients may be
negatively impacted when these support
schemes and initiatives are scaled back and
ultimately ended, which in turn could expose
NatWest Group to increased credit and
counterparty risk. In addition, the COVID-19
pandemic related uncertainties and the range
of prudential regulatory support has made
reliance on analytical models and planning
and forecasting for NatWest Group more
complex, and may result in uncertainty
impacting the risk profile of NatWest Group
and/or that of the wider banking industry. The
medium and long-term implications of the
COVID-19 pandemic for NatWest Group
customers, the UK housing market, and the
UK and global economies and financial
markets remain uncertain, and may continue
to have a material adverse effect on NatWest
Group’s business, results of operations and
outlook.
The adverse impact of the COVID-19
pandemic on the credit quality of NatWest
Group’s counterparties and the
implementation of support schemes in
response of the COVID-19 pandemic has
increased NatWest Group’s exposure to
counterparty risk, which may adversely
affect its business, results of operations
and outlook.
The effects of the COVID-19 pandemic have
adversely affected the credit quality of many
of NatWest Group’s borrowers and other
counterparties. As a result, NatWest Group
has experienced (and may continue to
experience) elevated exposure to credit risk
and demands on its funding from, for
example, customers and borrowers drawing
down upon committed credit facilities. If
borrowers or other counterparties default or
suffer deterioration in credit, this would
increase impairment charges, credit reserves,
write-downs and regulatory expected loss. An
increase in drawings upon committed credit
facilities may also increase NatWest Group’s
RWAs. In addition, the level of household
indebtedness in the UK remains high. The
ability of households to service their debts
could be worsened by a period of high
unemployment caused by the COVID-19
pandemic, particularly if prolonged. NatWest
Group’s mortgage and wholesale property
loans portfolio may also be subject to higher
impairment charges as a result of the COVID-
19 pandemic if volatility in the property market
results in weakened property prices,
particularly if default rates increase. If
NatWest Group experiences losses and a
reduction in future profitability, this is likely to
affect the recoverable value of fixed assets,
including goodwill and deferred taxes, which
may lead to further write-downs. See also,
‘NatWest Group has significant exposure to
counterparty and borrower risk’.
NatWest Group has applied an internal
analysis of multiple economic scenarios
(MES) together with the determination of
specific overlay adjustments to inform its IFRS
9 ECL (Expected Credit Loss). The
recognition and measurement of ECL is
complex and involves the use of significant
judgement and estimation. This includes the
formulation and incorporation of multiple
forward-looking economic scenarios into ECL
to meet the measurement objective of IFRS 9.
The ECL provision is sensitive to the model
inputs and economic assumptions underlying
the estimate. Going forward, NatWest Group
anticipates observable credit deterioration of a
proportion of assets resulting in a systematic
uplift in defaults, which is mitigated by those
economic assumption scenarios being
reflected in the Stage 2 ECL across portfolios,
along with a combination of post model
overlays in both wholesale and retail portfolios
reflecting the uncertainty of credit outcomes.
See also, ‘Risk and capital management’. A
credit deterioration would also lead to RWA
increases. Furthermore, the assumptions and
judgments used in the MES and ECL
assessment at 31 December 2020 may not
prove to be adequate resulting in incremental
ECL provisions for NatWest Group. As
government support schemes reduce,
defaults are expected to rise with more ECLs
cases moving from Stage 2 to Stage 3.
In line with certain mandated COVID-19
pandemic support schemes, NatWest Group
has sought to assist affected customers with a
number of initiatives including NatWest
Group’s participation in BBLS, CBILS and
CLBILS products. NatWest Group has sought
to manage the risks of fraud and money
laundering against the need for the fast and
efficient release of funds to customers and
businesses. NatWest Group may be exposed
to fraud, conduct and litigation risks arising
from inappropriate approval (or denial) of
BBLS or the enforcing or pursuing repayment
of CBILS and BBLS (or a failure to exercise
forbearance), which may have a material
adverse effect on NatWest Group’s reputation
and results of operations. The implementation
of the initiatives and efforts mentioned above
may result in litigation, regulatory and
NatWest Group Annual Report and Accounts 2020
345
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
government actions and proceedings. These
actions may result in judgments, settlements,
penalties or fines. Any of the above could
have a material adverse effect on NatWest
Group’s business, results of operations and
outlook.
The COVID-19 pandemic may adversely
affect NatWest Group’s strategy and
impair its ability to meet its targets and to
achieve its strategic objectives.
The COVID-19 pandemic may impact
NatWest Group’s ability to meet the financial,
capital and operational targets which it has set
as part of its Purpose-led Strategy, including
in relation to capital distributions and
dividends to shareholders by NatWest Group
plc. It is uncertain as to when NatWest Group
plc will be able to resume capital distributions
(and any associated distribution-linked
contribution to the NatWest Group Pension
Fund), including dividends to shareholders or
share buybacks. It is also uncertain as to
whether the PRA may, in the future, ask
banks to reconsider their approaches to
dividend payments and share buybacks, as it
did in March 2020 in response to the COVID-
19 pandemic. In addition, impairments or
other losses as well as increases to capital
deductions may result in a decrease to
NatWest Group plc’s capital base. The form
and timing of any capital distributions
therefore remains uncertain, and may depend
on a variety of factors, including the interests
of various stakeholders (such as UKGI).
The COVID-19 pandemic has also caused
significant market volatility, which would have
increased NatWest Group’s market risk RWA
significantly in the absence of temporary
changes in regulatory treatment. The risk of
further RWA inflation remains and the
duration of such regulatory relief is uncertain.
This may impair NatWest Group’s ability to
timely deliver on certain aspects of its
Purpose-led Strategy, including its plans to
repurpose the NatWest Markets franchise (the
‘NWM franchise’), which may have a material
adverse effect on NatWest Group’s business,
results of operations and outlook. See also,
‘NatWest Group is currently implementing its
Purpose-led Strategy, which carries significant
execution and operational risks and may not
achieve its stated aims and targeted
outcomes’.
It is uncertain as to how the broader
macroeconomic business environment and
societal norms may be impacted by the
COVID-19 pandemic, which is already
resulting in several significant wider societal
changes. For example, one of the most visible
effects of the COVID-19 pandemic has been
the impact on the most vulnerable groups of
society and concerns about systemic racial
biases and social inequalities.
In addition, the COVID-19 pandemic has
accelerated existing economic trends that
may radically change the way businesses are
run and people live their lives. These trends
include digitalisation, decarbonisation,
automation, e-commerce and agile working,
each of which has resulted in significant
market volatility in asset prices. There is also
increasing investor, regulatory and customer
scrutiny regarding how businesses address
these changes and related climate,
environmental, social, governance and other
sustainability issues, including workplace
health, safety and wellbeing, diversity and
inclusion, data privacy, workforce
management, human rights and supply chain
management. Any failure or delay by NatWest
Group to adapt its business strategy and to
establish and maintain effective governance,
procedures, systems and controls in response
to these changes and to manage emerging
climate, environmental, social, governance
and other sustainability-related risks and
opportunities may have a material adverse
effect on NatWest Group’s reputation,
business, results of operations and outlook
and the value of NatWest Group’s securities.
See also, ‘Any failure by NatWest Group to
implement effective and compliant climate
change resilient systems, controls and
procedures could adversely affect NatWest
Group’s ability to manage climate-related
risks’ and ‘A failure to adapt NatWest Group’s
business strategy, governance, procedures,
systems and controls to manage emerging
sustainability-related risks and opportunities
may have a material adverse effect on
NatWest Group’s reputation, business, results
of operations and outlook’.
The COVID-19 pandemic may also result in
unexpected developments or changes in
financial markets, the fiscal, tax and
regulatory frameworks and consumer
customer and corporate client behaviour,
which could intensify competition in the
financial services industry. If NatWest Group
is not able to adapt or compete effectively, it
could experience loss of business, which in
turn could adversely affect its business,
results of operations and outlook.
The COVID-19 pandemic has heightened
NatWest Group’s operational risks as
many of its employees are working
remotely which may also adversely affect
NatWest Group’s ability to maintain
effective internal controls.
Due to the COVID-19 pandemic, as at 31
January 2021, many of NatWest Group’s
employees continue to work remotely. This
has increased reliance on the IT systems that
enable remote working and increased
exposure to fraud, conduct, operational and
other risks and may place additional pressure
on NatWest Group’s ability to maintain
effective internal controls and governance
frameworks. The IT systems that enable
remote working interface with third-party
systems, and NatWest Group could
experience service denials or disruptions if
such systems exceed capacity or if a third-
party system fails or experiences any
interruptions, all of which could result in
business and customer interruption and
related reputational damage, significant
compensation costs, regulatory sanctions
and/or a breach of applicable regulations. See
also, ‘NatWest Group’s operations are highly
dependent on its complex IT systems
(including those that enable remote working)
and any IT failure could adversely affect
NatWest Group’.
Sustained periods of remote working may also
negatively affect workforce morale. While
NatWest Group has taken measures seeking
to maintain the health, wellbeing and safety of
its employees during the COVID-19
pandemic, these measures may be ineffective
and could result in increased expenses and
widespread illness could negatively affect
staffing within certain functions, businesses or
geographies. Certain areas of NatWest Group
also continue to experience workloads that
are heavier than usual as a result of increased
customer requirements, NatWest Group’s
COVID-19-specific product offerings or other
related direct and indirect effects. Resources
have been diverted from certain ordinary
course activities, and regulatory and other
change projects, including the implementation
of NatWest Group’s Purpose-led Strategy,
which may have implications for the execution
of related deliverables and meeting regulatory
and other deadlines. The economic impact of
the COVID-19 pandemic may also necessitate
changes in the remuneration of NatWest
Group employees, in particular at a senior
level. For example, in March 2020 the PRA
requested that bank boards in response to the
COVID-19 pandemic should consider taking
appropriate actions with regard to the accrual,
payment and vesting of variable
remuneration. Any of the above could impair
NatWest Group’s ability to hire, retain and
engage well-qualified employees, especially
at a senior level, which in turn may adversely
impact NatWest Group’s ability to serve its
customers efficiently and impact productivity
across NatWest Group. This could also
adversely affect NatWest Group’s reputation,
and competitive position and its ability to grow
its business.
Any of the above could have a material
adverse effect on NatWest Group’s business,
results of operations and outlook.
The effects of the COVID-19 pandemic
could affect NatWest Group’s ability to
access sources of liquidity and funding,
which may result in higher funding costs
and failure to comply with regulatory
capital, funding and leverage
requirements.
Depending on the severity and duration of
market volatility resulting from COVID-19
pandemic related uncertainties and the impact
on capital and RWAs, NatWest Group and its
subsidiaries may be required to adapt their
funding plans in order to satisfy their
respective capital and funding requirements,
which may have a material adverse effect on
NatWest Group. NatWest Group plc may also
receive less in dividends than expected from
its subsidiaries. Furthermore, significant
fluctuation in foreign currency exchange rates,
may affect capital deployed in NatWest
Group’s foreign subsidiaries, branches and
joint arrangements, securities issued by
NatWest Group in foreign currencies or the
value of assets, liabilities, income, RWAs,
capital base and expenses and the reported
earnings of NatWest Group’s UK and non-UK
NatWest Group Annual Report and Accounts 2020
346
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
subsidiaries. In response to the COVID-19
pandemic, there have been relaxations on
certain countercyclical buffer requirements
and stress tests as well as the calculation of
RWAs and leverage, which may be reinstated
in the future. Any downgrading to the credit
ratings and/or outlooks assigned to NatWest
Group plc, its subsidiaries and their respective
debt securities as a result of the economic
impact of the COVID-19 pandemic could
exacerbate funding and liquidity risk, which
could have a material adverse effect on
NatWest Group’s business, results of
operations and outlook.
NatWest Group’s results could be
adversely affected if the effects of the
COVID-19 pandemic or other events trigger
the recognition of a goodwill impairment.
NatWest Group capitalises goodwill, which is
calculated as the excess of the cost of an
acquisition over the net fair value of the
identifiable assets, liabilities and contingent
liabilities acquired. Acquired goodwill is
recognised at cost less any accumulated
impairment losses. As required by IFRS,
NatWest Group tests goodwill for impairment
at least annually, or more frequently when
events or circumstances indicate that it might
be impaired.
An impairment test compares the recoverable
amount (the higher of the value in use and fair
value less cost to sell) of an individual cash
generating unit with its carrying value. At 31
December 2020, NatWest Group plc carried
goodwill of £5.6 billion on its balance sheet.
The value in use and fair value of NatWest
Group’s cash-generating units are affected by
market conditions, the economies in which
NatWest Group operates and by the effects of
the COVID-19 pandemic.
The goodwill held by NatWest Group plc relies
on management’s assumptions on future
profitability. Goodwill is particularly sensitive
to changes in assumed future profitability,
including as a result of the effects of the
COVID-19 pandemic. If actual performance
were to fall below management’s forecasts,
then there is a risk that an impairment of
goodwill would become necessary.
Where NatWest Group is required to
recognise a goodwill impairment, it is
recorded in NatWest Group’s income
statement, but it has no effect on NatWest
Group’s regulatory capital position. Changes
in such assumptions may result in the carrying
balance being impaired, which could have a
material adverse effect on NatWest Group’s
business, results of operations and outlook.
Economic and political risk
Continuing uncertainty regarding the
effects of the UK’s withdrawal from the
European Union may continue to
adversely affect NatWest Group and its
operating environment.
After the 2016 EU Referendum, the UK
ceased to be a member of the EU and the
European Economic Area (‘EEA’) on 31
January 2020 (‘Brexit’). The 2020 EU-UK
Trade and Cooperation Agreement (‘TCA’)
ended the transition period on 31 December
2020 and provides for free trade between the
UK and EU with zero tariffs and quotas on all
goods that comply with the appropriate rules
of origin, with minimal coverage, however, for
financial services; UK-incorporated financial
services providers no longer have EU
passporting rights and there is no mutual
recognition regime. Financial services may
largely be subject to individual equivalence
decisions by relevant regulators. A number of
temporary equivalence decisions have been
made that cover all services offered by
NatWest Group. The EU’s equivalence regime
does not cover most lending and deposit
taking, and determinations in respect of third
countries have not, to date, covered the
provision of investment services. In addition,
equivalence determinations do not guarantee
permanent access rights and can be
withdrawn with short notice. The TCA is
accompanied by a Joint Declaration on
financial services which sets out an intention
for the EU and UK to cooperate on matters of
financial regulation and to agree a
Memorandum of Understanding by March
2021. There is no certainty, however, as to
the form, scope and timing of any such
Memorandum of Understanding.
NatWest Group has engaged in significant
and costly Brexit planning and contingency
planning. NatWest Group continues to monitor
regulatory developments, and NatWest Group
continues to seek advice on any transitional
regimes being introduced by individual EU
countries. It is updating its operating model
accordingly. NatWest Group also continues to
assess where NatWest Group companies can
obtain bilateral regulatory permissions to
permit business to continue from its UK
entities, transferring what cannot be continued
to be rendered from the UK to an EEA
subsidiary. Where such regulatory
permissions are temporary or are withdrawn,
a different approach may need to be taken or
may result in a change in operating model or
some business being ceased. Not all NatWest
Group entities have applied for bilateral
regulatory permissions and instead intend to
move EEA business to an EEA licenced
subsidiary. There is a risk that such EEA
licences may not be granted, and where these
permissions are not obtained, further changes
to NatWest Group’s operating model may be
required or some business may need to be
ceased. In addition, failure to obtain regulatory
permissions in one part of NatWest Group
may impact other parts of NatWest Group
adversely. Certain permissions are required in
order to maintain the ability to clear euro
payments and others will allow NatWest
Group to continue to serve non-UK EEA
customers. Furthermore, transferring business
to an EEA based subsidiary is a complex
exercise and involves legal, regulatory and
executional risks, and could result in a loss of
business, customers or greater than expected
costs. The changes to NatWest Group’s
operating model have been costly and further
347
changes to its business operations, product
offering and customer engagement could
result in further costs.
The effects of the UK’s exit from the EU and
the EEA are expected to continue to affect
many aspects of NatWest Group’s business
and operating environment, including as
described elsewhere in these risk factors, and
may be material and/or cause a near-term
impact on impairments.
The long-term effects of Brexit on NatWest
Group’s operating environment are difficult to
predict. They may be impacted by wider
global macro-economic trends and events,
particularly COVID-19 pandemic related
uncertainties, which may significantly impact
NatWest Group and its customers and
counterparties who are themselves dependent
on trading with the EU or personnel from the
EU. They may exacerbate the economic
impacts of the COVID-19 pandemic on the
UK, the Republic of Ireland (‘ROI’) and the
rest of EU/EEA.
Significant uncertainty remains as to the
extent to which EU/EEA laws will diverge from
UK law (including bank regulation), whether
and what equivalence determinations will be
made by the various regulators and therefore
what the respective legal and regulatory
arrangements will be, under which NatWest
Group and its subsidiaries will operate. The
legal and political uncertainty and any actions
taken as a result of this uncertainty, as well as
new or amended rules, could have a
significant adverse impact on NatWest
Group’s businesses and non-UK operations
and/or legal entity structure, including
attendant operating, compliance and
restructuring costs, level of impairments,
capital requirements, regulatory environment
and tax implications and as a result may
adversely impact NatWest Group’s
profitability, competitive position, business
model and product offering.
NatWest Group faces increased political
and economic risks and uncertainty in the
UK and global markets.
NatWest Group faces political uncertainty in
Scotland, as a result of a possible second
Scottish independence referendum.
Independence may adversely impact NatWest
Group with NatWest Group plc and other
NatWest Group entities (including NWM Plc)
being incorporated and/or headquartered in
Scotland. Any changes to Scotland’s
relationship with the UK or the EU (as an
indirect result of Brexit or other developments)
would impact the environment in which
NatWest Group and its subsidiaries operate,
and may require further changes to NatWest
Group’s structure, independently or in
conjunction with other mandatory or strategic
structural and organisational changes which
could adversely impact NatWest Group.
The outlook for the global economy over the
medium-term remains uncertain due to a
number of factors including: the COVID-19
pandemic, resulting societal inequalities and
changes, trade barriers and the increased
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
NatWest Group Annual Report and Accounts 2020
Risk factors
possibility of and/or continuation of trade
wars, widespread political instability (including
as a result of populism and nationalism, which
may lead to protectionist policies), an
extended period of low inflation and low (or
negative) interest rates, climate,
environmental, social and other sustainability-
related risks and global regional variations in
the impact and responses to these factors.
These conditions could be worsened by a
number of factors including macro-economic
deterioration, increased instability in the global
financial system and concerns relating to
further financial shocks or contagion (for
example, due to economic concerns in
emerging markets), market volatility or
fluctuations in the value of the pound sterling,
new or extended economic sanctions,
volatility in commodity prices or concerns
regarding sovereign debt. This may be
compounded by the ageing demographics of
the populations in the markets that NatWest
Group serves, increasing inequalities, or rapid
change to the economic environment due to
the adoption of technology and artificial
intelligence. Any of the above developments
could adversely impact NatWest Group
directly (for example, as a result of credit
losses) or indirectly (for example, by
impacting global economic growth and
financial markets and NatWest Group’s
customers and their banking needs).
In addition, NatWest Group is exposed to
risks arising out of geopolitical events or
political developments, such as, exchange
controls and other measures taken by
sovereign governments that may hinder
economic or financial activity levels.
Furthermore, unfavourable political, military or
diplomatic events, including secession
movements or the exit of other member states
from the EU, armed conflict, pandemics and
widespread public health crises (including the
current COVID-19 pandemic and any future
epidemics or pandemics), state and privately
sponsored cyber and terrorist acts or threats,
and the responses to them by governments
and markets, could negatively affect the
business and performance of NatWest Group,
including as a result of the indirect effect on
regional or global trade and/or NatWest
Group’s customers.
The value of NatWest Group’s financial
instruments may be materially affected by
market risk, including as a result of market
fluctuations. Market volatility, illiquid market
conditions and disruptions in the credit
markets may make it extremely difficult to
value certain of NatWest Group’s financial
instruments, particularly during periods of
market displacement. This could cause a
decline in the value of NatWest Group’s
financial instruments, which may have an
adverse effect on NatWest Group’s results of
operations in future periods, or inaccurate
carrying values for certain financial
instruments.
In addition, financial markets are susceptible
to severe events evidenced by rapid
depreciation in asset values, which may be
accompanied by a reduction in asset liquidity.
Under these conditions, hedging and other
risk management strategies may not be as
effective at mitigating trading losses as they
would be under more normal market
conditions. Moreover, under these conditions,
market participants are particularly exposed to
trading strategies employed by many market
participants simultaneously and on a large
scale, increasing NatWest Group’s
counterparty risk. NatWest Group’s risk
management and monitoring processes seek
to quantify and mitigate NatWest Group’s
exposure to more extreme market moves.
However, severe market events have
historically been difficult to predict and
NatWest Group could realise significant
losses if extreme market events were to
occur.
Changes in interest rates have
significantly affected and will continue to
affect NatWest Group’s business and
results.
Interest rate risk is significant for NatWest
Group. Monetary policy has been
accommodative in recent years including
initiatives implemented by the Bank of
England and HM Treasury, such as the Term
Funding Scheme with additional incentives for
SMEs (‘TFSME’), which have helped to
support demand at a time of pronounced
fiscal tightening and balance sheet repair.
However, there remains considerable
uncertainty as to the future direction of
interest rates and pace of change (as set by
the Bank of England), including as a result of
the COVID-19 pandemic and its effect on the
UK economy as well as the general UK
political or economic climate. Further
decreases in interest rates and/or continued
sustained low or negative interest rates would
be expected to continue to put further
pressure on NatWest Group’s interest income
and profitability. Zero or negative interest
rates will require investment spend to
implement a strategic solution to allow a
potential pass-through of those interest rates
in certain systems to relevant customer
segments. A lower or negative interest rate
environment is likely to have an adverse
impact on the profitability of NatWest Group.
Conversely, while increases in interest rates
may support NatWest Group’s interest
income, sharp increases in interest rates
could have macroeconomic effects that lead
to adverse outcomes for the business. For
example, they could lead to generally weaker
than expected growth, or even contracting
GDP, reduced business confidence, higher
default rates on customer loans, higher levels
of unemployment or underemployment, and
falling property prices in the markets in which
NatWest Group operates, all of which could
adversely affect the business and
performance of NatWest Group.
HM Treasury (or UKGI on its behalf) could
exercise a significant degree of influence
over NatWest Group and further offers or
sales of NatWest Group’s shares held by
HM Treasury may affect the price of
securities issued by NatWest Group.
In its March 2020 Budget, the UK Government
announced its intention to continue the
process of privatisation of NatWest Group plc
and to carry out a programme of sales of
NatWest Group plc ordinary shares with the
objective of selling all of its remaining shares
in NatWest Group plc by 2025. On 6 February
2019, NatWest Group plc obtained
shareholder authority to make off-market
purchases of its ordinary shares from HM
Treasury under the terms of a directed
buyback contract. The authority provided by
this contract was renewed at NatWest
Group’s Annual General Meeting on 29 April
2020. As at 31 December 2020, the UK
Government held 61.9% of the issued
ordinary share capital of NatWest Group plc.
There can be no certainty as to the
continuation of the sell-down process or the
timing or extent of such sell-downs, which
could result in a prolonged period of increased
price volatility on NatWest Group’s ordinary
shares.
Any offers or sales of a substantial number of
ordinary shares by HM Treasury, expectations
relating to the timing thereof, or any
associated directed buyback activity by
NatWest Group, could affect the prevailing
market price for the outstanding ordinary
shares of NatWest Group plc.
HM Treasury has indicated that it intends to
respect the commercial decisions of NatWest
Group and that NatWest Group will continue
to have its own independent board of directors
and management team determining its own
strategy. However, HM Treasury, as majority
shareholder, and UK Government
Investments Limited (‘UKGI’), as manager of
HM Treasury’s shareholding, could exercise a
significant degree of influence over the
election of directors and appointment of senior
management, NatWest Group’s capital
strategy, dividend policy, remuneration policy
or the conduct of NatWest Group’s
operations, and other things. HM Treasury or
UKGI’s approach depends on government
policy, which could change, including as a
result of a general election. The manner in
which HM Treasury or UKGI exercises HM
Treasury’s rights as majority shareholder
could give rise to conflicts between the
interests of HM Treasury and the interests of
other shareholders, including as a result of a
change in government policy.
Changes in foreign currency exchange
rates may affect NatWest Group’s results
and financial position.
Decisions of major central banks (including
the Bank of England, the European Central
Bank and the US Federal Reserve) and
political or market events, which are outside
NatWest Group’s control, may lead to sharp
and sudden variations in foreign exchange
rates.
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
NatWest Group Annual Report and Accounts 2020
348
Risk factors
Although NatWest Group is now principally a
UK and ROI-focused banking group, it is
subject to foreign exchange risk from capital
deployed in NatWest Group’s foreign
subsidiaries, branches and joint arrangements
and customer transactions denominated in a
currency other than the functional currency of
NatWest Group. NatWest Group also relies on
issuing securities in foreign currencies that
assist in meeting NatWest Group’s minimum
requirements for own funds and eligible
liabilities (‘MREL’) and NWM Plc deals foreign
exchange instruments. NatWest Group
maintains policies and procedures designed
to manage the impact of exposures to
fluctuations in currency rates. Nevertheless,
changes in currency rates, particularly in the
sterling-US dollar and euro-sterling rates, can
adversely affect the value of assets, liabilities
(including the total amount MREL eligible
instruments), foreign exchange dealing
activity, income and expenses, RWAs and
hence the reported earnings and financial
condition of NatWest Group.
Strategic risk
NatWest Group is currently implementing
its Purpose-led Strategy, which carries
significant execution and operational risks
and may not achieve its stated aims and
targeted outcomes.
In February 2020, NatWest Group announced
a new strategy, focused on becoming a
Purpose-led business, designed to champion
potential and to help individuals, families and
businesses to thrive. This strategy is intended
to reflect the rapidly shifting environment and
backdrop of unprecedented disruption in
society driven by technology and changing
customer expectations, as accelerated by the
COVID-19 pandemic. NatWest Group aims to
deliver this strategy, referred to as its
‘Purpose-led Strategy’, through: (i) four
strategic priorities: ‘supporting customers at
every stage of their lives;’ ‘powered by
innovation and partnerships;’ ‘simple to deal
with’; and ‘sharpened capital allocation;’ and
(ii) three areas of focus: climate change,
enterprise and learning. This strategy
requires an internal cultural shift across
NatWest Group as to how performance is
perceived and how NatWest Group conducts
its business. These changes are substantial
and will take many years to fully embed.
These changes may not result in the expected
outcome within the timeline and in the manner
currently contemplated.
To deliver against this purpose and deliver
sustainable returns, NatWest Group has
been: focusing on the lifecycles of its
customers using insights about customers to
evolve product and service offerings; re-
engineering and simplifying NatWest Group
by updating operational and technological
capabilities and strengthening governance
and control frameworks to reduce costs and
improve customer journeys; focusing on
innovation and partnership to drive change
and achieve growth in new product areas and
customer segments; and having a sharper
focus on capital allocation and deploying it
more effectively for customers, in particular by
refocusing its NWM franchise and through its
phased withdrawal from ROI.
As part of its Purpose-led Strategy, NatWest
Group has set a number of financial, capital
and operational targets and expectations,
both for the short term and throughout the
implementation period. These include targets,
amongst others, for: return on tangible equity,
CET1 ratio and dividend pay-out ratio.
Achieving these targets requires further
significant reductions to NatWest Group’s cost
base. Realising these cost reductions will
result in material strategic costs, which may
be more than currently expected. The
continued focus on meeting cost reduction
targets may also mean limited investment in
other areas, which could affect NatWest
Group’s long-term prospects, product offering
or competitive position and its ability to meet
its other targets and commitments, including
those related to customer satisfaction and its
capacity to respond to climate -related risks
and opportunities in line with its ambition. Any
of the factors above, could jeopardise
NatWest Group’s ability to achieve its
associated financial targets and generate
sustainable returns.
Implementing the Purpose-led Strategy is
highly complex as discussed above. More
generally, NatWest Group may seek to adapt
its strategy, including in respect of
acquisitions, divestments, restructurings,
reorganisations or partnerships. There
remains uncertainty as to consolidation within
the financial industry and the scale and timing
of any further NatWest Group strategic
initiatives or participation in any such
consolidation.
NatWest Group may not be able to
successfully (i) implement all aspects of its
strategy; (ii) reach any or all of the related
targets or expectations of its Purpose-led
Strategy; (iii) realise the intended strategic
objectives of any other future strategic
initiative, in the time frames contemplated or
at all, which may require additional
management actions by NatWest Group. In
addition, NatWest Group’s ability to serve its
target customers, scale certain ventures,
deliver growth in new markets, refocus the
NWM franchise and implement a phased
withdrawal from ROI may be impacted and
the anticipated revenue, profitability and cost
reduction levels may not be achieved in the
timescale envisaged or at all. Moreover,
NatWest Group’s strategy involves a large
number of concurrent and strategic actions
and initiatives, including refocusing of the
NWM franchise and the phased withdrawal
from ROI, any of which could fail to be
implemented in the manner and to the extent
currently contemplated, including as a result
of operational, legal, execution or other
issues.
The refocusing of the NWM franchise and
NatWest Group’s phased withdrawal from ROI
are two strategic initiatives that may entail
significant commercial, operational, legal and
execution risks. For the risks relating to the
refocusing of the NWM franchise, see
‘NatWest Group is in the process of
refocusing its NWM franchise, which entails
significant commercial, operational and
execution risks and the intended benefits for
NatWest Group may not be realised within the
timeline and in the manner currently
contemplated’. NatWest Group’s phased
withdrawal from ROI, which may involve
transfers of business, assets and liabilities to
third parties, entails many risks, the most
significant of which include: (i) anticipated
reductions in net income, total lending and
RWAs; (ii) potential trapped or stranded
capital; (iii) the diversion of management
resources and attention away from day-to-day
management; (iv) the recognition of disposal
losses as part of the orderly run-down of
certain loan portfolios which may be higher
than anticipated; (v) execution risks arising
from the significant uncertainties of a phased
withdrawal, including the additional IT and
operational expense and resource required to
mitigate manual and limited customer
switching and handling processes of Ulster
Bank, potential counterparties and other
banks; (vi) customer action or inaction, or the
inability to obtain necessary approvals and/or
support from governmental authorities,
regulators, trade unions and/or other
stakeholders resulting in additional cost,
resource and delays; (vii) potential loss of
customers, resulting in retail and commercial
deposit outflows (or a failure to attract deposit
inflows) and reduced revenues and liquidity;
(viii) increased people risk through the
potential loss of key colleagues and
institutional knowledge and increased
challenges of attracting and retaining
colleagues; (ix) regulatory risk, including in
relation to prudential, conduct and other
regulatory requirements; (x) the potential early
repayment of ECB funding and no or limited
access to other Euro system funding
arrangements; (xi) brand and reputational risks
due to press speculation and stakeholder
scrutiny about the future of the ROI business.
Any of these risks and uncertainties may cost
more, be more complex or worse than
currently estimated and may adversely affect
NatWest Group’s ability to execute a phased
withdrawal from ROI.
In addition, successful implementation of
NatWest Group’s strategy in part depends on
initiatives and growth in ventures that are new
to NatWest Group or to the market. There is a
risk, therefore, that some or all these
initiatives will not succeed, or may be limited
in scope or scale, including due to its current
ownership structure.
The scale and scope of the intended changes
present material business, operational, IT
system, internal culture, conduct and people
risks to NatWest Group as the planning and
implementation of the transformation
programme are resource-intensive and
disruptive, and will divert management
resources. In addition, implementing many
changes concurrently, in particular with
respect to any strategic partnerships,
acquisitions or divestments, will require
application of robust governance and controls
frameworks and robust IT systems. There is a
NatWest Group Annual Report and Accounts 2020
349
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
risk that NatWest Group may not be
successful in doing so. The implementation of
the Purpose-led Strategy and any other
strategic initiatives could result in materially
higher costs than initially contemplated
(including due to material uncertainties and
factors outside of NatWest Group’s control)
and may not be completed when planned, or
at all, or could be phased or could progress in
a manner other than currently expected.
Changes in the economic, political and
regulatory environment in which NatWest
Group operates or regulatory uncertainty and
changes, strong market competition and
industry disruption or economic volatility,
including as a result of the economic impact of
the COVID-19 pandemic, continued
uncertainty surrounding the terms of the UK’s
future trading arrangements with the EU or
changes in the scale and timing of policy
responses on climate change, may require
NatWest Group to adjust aspects of its
strategy or the timeframe for its
implementation including in relation to its
financial, capital and operational targets and
expectations. Because certain initiatives
depend on achieving growth in new ventures
and opportunities for NatWest Group, its
strategy is vulnerable to an economic
downturn. NatWest Group’s strategy also
requires ongoing confidence from customers
and the wider market, without which customer
activity and related income levels may fall or
NatWest Group’s reputation may be adversely
affected.
Each of these risks, and others identified in
these Risk Factors, individually or collectively
could jeopardise the implementation and
delivery of the Purpose-led Strategy and other
strategic initiatives, result in higher than
expected restructuring costs, impact NatWest
Group’s products and services offering, its
reputation with customers or business model
and adversely impact NatWest Group’s ability
to deliver its strategy and meet its targets and
guidance, each of which could have a material
adverse impact on NatWest Group’s
business, results of operations and outlook.
NatWest Group is in the process of
refocusing its NWM franchise, which
entails significant commercial, operational
and execution risks and the intended
benefits for NatWest Group may not be
realised within the timeline and in the
manner currently contemplated.
As part of its Purpose-led Strategy, NatWest
Group has been seeking to implement a more
strategically congruent and economically
sustainable model for its NWM franchise. As
part of this, NatWest Group has been
refocusing the NWM franchise to principally
serve NatWest Group’s corporate and
institutional customer base. This requires
NWM Group to simplify its operating model
and technology platform, as well as reduce its
cost base and capital requirements. A focus of
the NWM franchise refocusing is the intended
reduction in its level of RWAs. This is
intended to be achieved by exiting certain
exposures and optimising inefficient capital
across the NWM Group, especially in relation
to its Rates products.
The refocusing of the NWM franchise entails
significant execution risks and is based on
management plans, projections and models
and is subject to certain material assumptions
and judgments which may prove to be
incorrect such that the go-forward strategy is
re-assessed (for example, if revenues reduce
relatively faster than costs; material execution
issues arise or market distress occurs; RWAs
take longer to exit or are more costly to
reduce than anticipated; or the key franchise
legal entities, NWM Plc and NWM N.V., have
difficulties accessing the funding market on
acceptable terms or at all).
Implementing these changes to the NWM
franchise entails significant commercial and
operational and risks. These include risks
around how it is perceived by its customers
and stakeholders and the ability for NWM to
retain employees required to deliver the
transition and whom are key for its go-forward
strategic priorities. Revenues and costs may
be negatively impacted (revenues, for
example, may decrease significantly more
quickly than associated costs) and the
implementation may be more difficult or
expensive than expected, including as a result
of the COVID-19 pandemic, the UK’s exit from
the EU and regulatory requirements. The
orderly run-down of certain of its portfolios
and the reduction of its RWAs may be
accompanied by the recognition of disposal
losses which may be higher than anticipated,
including due to a degraded economic
environment (in particular, as a result of the
COVID-19 pandemic), and may not lead to a
concurrent and proportionate reduction in
required capital. The NWM Plc and NWM N.V.
boards support the financial plans and
budgets, but continued successful
implementation of this strategy within the
NWM franchise will require their continued
support, as well as the support of NWM Plc
and NWM N.V. management.
Financial resilience risk
NatWest Group may not meet targets and
be in a position to continue to make
discretionary capital distributions
(including dividends to shareholders).
As part of NatWest Group’s strategy, NatWest
Group has become a UK and ROI-focused
banking group and as part of its Purpose-led
Strategy has set a number of financial, capital
and operational targets for NatWest Group
including in respect of: CET1 ratio targets,
return on tangible equity (‘ROTE’), leverage
ratio targets, funding plans and requirements,
reductions in RWAs and the timing thereof,
employee engagement, diversity and inclusion
as well as environmental, social and customer
satisfaction targets and discretionary capital
distributions (including dividends to
shareholders). See also, ‘NatWest Group is
currently implementing its Purpose-led
Strategy, which carries significant execution
and operational risks and may not achieve its
stated aims and targeted outcomes’.
NatWest Group’s ability to meet its targets
and to successfully meet its strategy is subject
to various internal and external factors and
risks. These include, but are not limited to, the
impact of the COVID-19 pandemic, market,
regulatory, macroeconomic and political
uncertainties, operational risks and risks
relating to NatWest Group’s business model
and strategy (including risks associated with
climate, environmental, governance and other
sustainability-related issues) and litigation,
governmental actions, investigations and
regulatory matters.
A number of factors, including the economic
and other effects of the COVID-19 pandemic,
may impact NatWest Group’s ability to
maintain its CET1 ratio target and make
discretionary capital distributions. See also,
‘NatWest Group may not meet the prudential
regulatory requirements for capital and MREL,
or manage its capital effectively, which could
trigger the execution of certain management
actions or recovery options’.
NatWest Group’s ability to meet its planned
reductions in its annual underlying costs may
vary considerably from year to year.
Furthermore, the focus on meeting cost
reduction targets may result in limited
investment in other areas, which could affect
NatWest Group’s long-term product offering or
competitive position and its ability to meet its
other targets, including those related to
customer satisfaction.
There is a risk that NatWest Group may not
meet its targets and expectations or be in a
position to continue to distribute capital when
regulatory distribution restrictions are eased,
or that NatWest Group will be a viable,
competitive or profitable banking business.
NatWest Group operates in markets that
are highly competitive, with increasing
competitive pressures and technology
disruption.
The markets within which NatWest Group
operates are highly competitive. NatWest
Group expects such competition to continue
and intensify in response to the economic
effects of the COVID-19 pandemic and other
changes. These include evolving customer
behaviour, technological changes (including
digital currencies and the growth of digital
banking, including from fintech entrants),
competitor behaviour, new entrants to the
market (including non-traditional financial
services providers such as large retail or
technology conglomerates, who may have
competitive advantages in scale, technology
and customer engagement), competitive
foreign-exchange offerings, industry trends
resulting in increased disaggregation or
unbundling of financial services or conversely
the re-intermediation of traditional banking
services, and the impact of regulatory actions
and other factors. In particular, developments
in the financial sector resulting from new
banking, lending and payment solutions
offered by rapidly evolving incumbents,
challengers and new entrants, notably with
respect to payment services and products,
and the introduction of disruptive technology
may impede NatWest Group’s ability to grow
NatWest Group Annual Report and Accounts 2020
350
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
or retain its share and impact its revenues and
profitability, particularly in its key UK retail
banking segment. Moreover, innovations such
as biometrics, artificial intelligence, the cloud,
blockchain, and quantum computing may
rapidly facilitate industry transformation.
These trends have accelerated during the
COVID-19 pandemic and may be catalysed
by various regulatory and competition policy
interventions, including the UK initiative on
Open Banking (PSD2), Open Finance and
other remedies imposed by the Competition
and Markets Authority (CMA) which are
designed to further promote competition within
retail banking, as well as the competition-
enhancing measures under NatWest Group’s
Alternative Remedies Package. See also,
‘The cost of implementing the Alternative
Remedies Package (‘ARP’) could be more
onerous than anticipated’.
Increasingly many of the products and
services offered by NatWest Group are, and
will become, more technology intensive. For
example, NatWest Group recently invested in
a number of fintech ventures, including Mettle,
FreeAgent, Tyl, Mentor Digital and Rapid
Cash. NatWest Group’s ability to develop
such digital solutions (which also need to
comply with applicable and evolving
regulations) has become increasingly
important to retaining and growing NatWest
Group’s customer business in the UK. There
can be no certainty that NatWest Group’s
innovation strategy (which includes
investment in its IT capability intended to
address the material increase in customer use
of online and mobile technology for banking
as well as selective acquisitions, which carry
associated risks) will be successful or that it
will allow NatWest Group to continue to grow
such services in the future. Certain of
NatWest Group’s current or future competitors
may be more successful in implementing
innovative technologies for delivering products
or services to their customers. NatWest Group
may also fail to identify future opportunities or
derive benefits from disruptive technologies in
the context of rapid technological innovation,
changing customer behaviour and growing
regulatory demands, resulting in increased
competition from traditional banking
businesses as well as new providers of
financial services, including technology
companies with strong brand recognition, that
may be able to develop financial services at a
lower cost base.
NatWest Group’s competitors may also be
better able to attract and retain customers and
key employees, may have better IT systems,
and may have access to lower cost funding
and/or be able to attract deposits on more
favourable terms than NatWest Group.
Although NatWest Group invests in new
technologies and participates in industry and
research led initiatives aimed at developing
new technologies, such investments may be
insufficient or ineffective, especially given
NatWest Group’s focus on its cost savings
targets. This may limit additional investment in
areas such as financial innovation and could
therefore affect NatWest Group’s offering of
innovative products or technologies for
delivering products or services to customers
and its competitive position. Furthermore, the
development of innovative products depends
on NatWest Group’s ability to produce
underlying high-quality data, failing which its
ability to offer innovative products may be
compromised.
market or borrower, or fail to adequately value
physical or financial collateral. This may result
in increased default rates or a higher loss
given default for loans, which may, in turn,
impact NatWest Group’s profitability. See
also, ‘Risk and capital management — Credit
Risk’.
If NatWest Group is unable to offer
competitive, attractive and innovative products
that are also profitable and timely, it will lose
share, incur losses on some or all of its
activities and lose opportunities for growth. In
this context, NatWest Group is investing in the
automation of certain solutions and
interactions within its customer-facing
businesses, including through artificial
intelligence. Such initiatives may result in
operational, reputational and conduct risks if
the technology used is defective, or is not fully
integrated into NatWest Group’s current
solutions. There can be no certainty that such
initiatives will deliver the expected cost
savings and investment in automated
processes will likely also result in increased
short-term costs for NatWest Group.
In addition, the implementation of its Purpose-
led Strategy, including the refocusing of its
NWM franchise, NatWest Group’s phased
withdrawal from ROI, acquisitions,
divestments, reorganisations and
restructurings and partnerships, and delivery
on its climate ambition, cost-reduction
measures, as well as employee remuneration
constraints, may also have an impact on its
ability to compete effectively and intensified
competition from incumbents, challengers and
new entrants could affect NatWest Group’s
ability to maintain satisfactory returns.
Moreover, activist investors have increasingly
become engaged and interventionist in recent
years, which may pose a threat to NatWest
Group’s strategic initiatives. Furthermore,
continued consolidation or technological or
other developments in certain sectors of the
financial services industry could result in
NatWest Group’s remaining competitors
gaining greater capital and other resources,
including the ability to offer a broader range of
products and services and geographic
diversity, or the emergence of new
competitors, each of which may adversely
affect NatWest Group’s business, results of
operations and outlook.
NatWest Group has significant exposure to
counterparty and borrower risk.
NatWest Group has exposure to many
different industries, customers and
counterparties, and risks arising from actual or
perceived changes in credit quality and the
recoverability of monies due from borrowers
and other counterparties are inherent in a
wide range of NatWest Group’s businesses.
NatWest Group is exposed to credit risk if a
customer, borrower or counterparty defaults,
or under IFRS 9, suffers a sufficiently
significant deterioration of credit quality such
that, under SICR (‘significant increases in
credit risk’) rules, it moves to Stage 2 for
impairment calculation purposes. NatWest
Group’s lending strategy and associated
processes may fail to identify or anticipate
weaknesses or risks in a particular sector,
The credit quality of NatWest Group’s
borrowers and other counterparties is
impacted by prevailing economic and market
conditions (including those caused by the
COVID-19 pandemic) and by the legal and
regulatory landscape in the UK and any
deterioration in such conditions or changes to
legal or regulatory landscapes could worsen
borrower and counterparty credit quality and
consequently impact NatWest Group’s ability
to enforce contractual security rights.
NatWest Group may be affected by volatility in
property prices (including as a result of Brexit,
the general UK political or economic climate
or the COVID-19 pandemic) given that
NatWest Group’s mortgage loan and
wholesale property loan portfolios as at 31
December 2020, amounted to £228.6 billion,
representing 61.4% of NatWest Group’s total
customer loan exposure. If property prices
were to weaken this could lead to higher
impairment charges, particularly if default
rates also increase. In addition, NatWest
Group’s credit risk may be exacerbated if the
collateral that it holds cannot be realised as a
result of market conditions or regulatory
intervention or if it is liquidated at prices not
sufficient to recover the net amount after
accounting for any IFRS provisions already
made. This is most likely to occur during
periods of illiquidity or depressed asset
valuations.
Concerns about, or a default by, a financial
institution could lead to significant liquidity
problems and losses or defaults by other
financial institutions, since the commercial
and financial soundness of many financial
institutions is closely related and inter-
dependent as a result of credit, trading,
clearing and other relationships. Any
perceived lack of creditworthiness of a
counterparty may lead to market-wide liquidity
problems and losses for NatWest Group. This
systemic risk may also adversely affect
financial intermediaries, such as clearing
agencies, clearing houses, banks, securities
firms and exchanges with which NatWest
Group interacts on a daily basis. See also,
‘NatWest Group may not be able to
adequately access sources of liquidity and
funding’.
As a result, changes in borrower and
counterparty credit quality may cause
accelerated impairment charges under IFRS
9, increased repurchase demands, higher
costs, additional write-downs and losses for
NatWest Group and an inability to engage in
routine funding transactions.
NatWest Group is exposed to the financial
industry, including sovereign debt securities,
banks, financial intermediation providers
(including providing facilities to financial
sponsors and funds, backed by assets or
NatWest Group Annual Report and Accounts 2020
351
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
investor commitments) and securitised
products (typically senior lending to special
purpose vehicles backed by pools of financial
assets). Due to NatWest Group’s exposure to
the financial industry, it also has exposure to
shadow banking entities (i.e. entities which
carry out banking activities outside a
regulated framework). Recently, there has
been increasing regulatory focus on shadow
banking. In particular, the European Banking
Authority (EBA/GL/2015/20) require NatWest
Group to identify and monitor its exposure to
shadow banking entities, implement and
maintain an internal framework for the
identification, management, control and
mitigation of the risks associated with
exposure to shadow banking entities, and
ensure effective reporting and governance in
respect of such exposure. If NatWest Group is
unable to properly identify and monitor its
shadow banking exposure, maintain an
adequate framework, or ensure effective
reporting and governance in respect of
shadow banking exposure, this may adversely
affect the business, results of operations and
outlook of NatWest Group.
NatWest Group may not meet the
prudential regulatory requirements for
capital and MREL, or manage its capital
effectively, which could trigger the
execution of certain management actions
or recovery options.
NatWest Group is required by regulators in
the UK, the EU and other jurisdictions in
which it undertakes regulated activities to
maintain adequate financial resources.
Adequate capital also gives NatWest Group
financial flexibility in the face of turbulence
and uncertainty in the global economy and
specifically in its core UK and European
operations, as well as permitting NatWest
Group plc to make discretionary capital
distributions (including dividends to
shareholders).
As at 31 December 2020, NatWest Group
plc’s CET1 ratio was 18.5% and NatWest
Group plc currently maintains a CET1 ratio
target. NatWest Group plc’s target capital ratio
is based on a combination of its expected
regulatory requirements and internal
modelling, including stress scenarios and
management’s and/or the PRA’s views on
appropriate buffers above minimum operating
levels.
NatWest Group plc’s current capital strategy
is based on the expected accumulation of
additional capital through the accrual of profits
over time, planned capital actions (including
issuances, redemptions, and discretionary
capital distributions), RWA growth in the form
of regulatory uplifts and lending growth and
other capital management initiatives which
focus on improving capital efficiency.
A number of factors may impact NatWest
Group plc’s ability to maintain its current
CET1 ratio target and achieve its capital
strategy. These include, amongst other things:
• a depletion of its capital resources
through increased costs or liabilities or
reduced profits;
• an increase in the quantum of RWAs in
excess of that expected, including due to
regulatory changes;
• changes in prudential regulatory
requirements including NatWest Group
plc’s Total Capital Requirement set by the
PRA, including Pillar 2 requirements and
regulatory buffers as well as any
applicable scalars;
• reduced dividends from NatWest Group’s
subsidiaries because of changes in their
financial performance and/or the extent to
which local capital requirements exceed
NatWest Group plc’s target ratio; and
limitations on the use of double leverage,
i.e. NatWest Group plc’s use of debt to
invest in the equity of its subsidiaries, as a
result of the Bank of England’s and/or
NatWest Group’s evolving views on
distribution of capital within groups.
•
A shortage of capital could in turn affect
NatWest Group plc’s capital ratio, and/or
ability to make capital distributions.
A minimum level of capital adequacy is
required to be met by NatWest Group plc for it
to be entitled to make certain discretionary
payments, and institutions which fail to meet
the combined buffer requirement are subject
to restricted discretionary payments. The
resulting restrictions are scaled according to
the extent of the breach of the combined
buffer requirement and calculated as a
percentage of the profits of the institution
since the last distribution of profits or
discretionary payment which gives rise to a
maximum distributable amount (MDA) (if any)
that the financial institution can distribute
through discretionary payments. In the event
of a breach of the combined buffer
requirement, it may be necessary for NatWest
Group plc to reduce or cease discretionary
payments (including payments of dividends to
shareholders) to the extent of the breach.
NatWest Group is required to maintain a set
quantum of MREL set as the higher of its
RWAs or leverage requirement. The Bank of
England has identified single point-of-entry as
the preferred resolution strategy for NatWest
Group. As a result, NatWest Group plc is the
only entity that can externally issue securities
that count towards its MREL requirements,
the proceeds of which can then be
downstreamed to meet the internal MREL
issuance requirements of its operating entities
and intermediate holding companies.
If NatWest Group plc is unable to raise the
requisite amount of regulatory capital or
MREL, downstream the proceeds of MREL to
subsidiaries as required, or to otherwise meet
its regulatory capital, MREL and leverage
requirements, it may be exposed to increased
regulatory supervision or sanctions, loss of
investor confidence, constrained or more
expensive funding and be unable to make
dividend payments on its ordinary shares or
maintain discretionary payments on capital
instruments.
If, under a stress scenario, the level of capital
or MREL falls outside of risk appetite, there
are a range of recovery management actions
(focused on risk reduction and mitigation) that
NatWest Group could take to manage its
capital levels, but any such actions may not
be sufficient to restore adequate capital
levels. Under the EU Bank Recovery and
Resolution Directives I and II (‘BRRD’), as
implemented in the UK, NatWest Group must
maintain a recovery plan acceptable to its
regulator, such that a breach of NatWest
Group’s applicable capital or leverage
requirements may trigger the application of
NatWest Group’s recovery plan to remediate
a deficient capital position. NatWest Group’s
regulator may request that NatWest Group
carry out certain capital management actions
or, if NatWest Group plc’s CET1 ratio falls
below 7%, certain regulatory capital
instruments issued by NatWest Group will be
written-down or converted into equity and
there may be an issue of additional equity by
NatWest Group plc, which could result in the
dilution of NatWest Group plc’s existing
shareholders. The success of such issuances
will also be dependent on favourable market
conditions and NatWest Group may not be
able to raise the amount of capital required on
acceptable terms or at all. Separately,
NatWest Group may address a shortage of
capital by taking action to reduce leverage
exposure and/or RWAs via asset or business
disposals. These actions may, in turn, affect,
among other things, NatWest Group’s product
offering, credit ratings, ability to operate its
businesses, pursue its current strategies and
pursue strategic opportunities, any of which
may affect the underlying profitability of
NatWest Group and future growth potential.
See also, ‘NatWest Group may become
subject to the application of UK statutory
stabilisation or resolution powers which may
result in, among other actions, the
cancellation, transfer or dilution of ordinary
shares, or the write-down or conversion of
certain other of NatWest Group’s securities’.
NatWest Group is subject to Bank of
England oversight in respect of resolution,
and NatWest Group could be adversely
affected should the Bank of England deem
NatWest Group’s preparations to be
inadequate.
NatWest Group is subject to regulatory
oversight by the Bank of England, and is
required (under the PRA rulebook) to carry
out an assessment of its preparations for
resolution, submit a report of the assessment
to the PRA, and disclose a summary of this
report. The initial report is due to be submitted
to the PRA on 1 October 2021 and the Bank
of England’s assessment of NatWest Group’s
preparations is scheduled to be released on
10 June 2022. The form and substance of the
June publication is yet to be established.
NatWest Group has dedicated significant
resources towards the preparation of NatWest
Group for a potential resolution scenario.
However, if the assessment reveals that
NatWest Group is not adequately prepared to
be resolved, or does not have adequate plans
in place to meet resolvability requirements by
1 January 2022, NatWest Group may be
required to take action to enhance its
preparations to be resolvable, resulting in
NatWest Group Annual Report and Accounts 2020
352
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
additional costs and the dedication of
additional resources. Such a scenario may
result in restrictions on NatWest Group’s
maximum individual and aggregate
exposures, a requirement to dispose of
specified assets, a requirement to cease
carrying out certain activities and/or
maintaining a specified amount of MREL,
consequently having an adverse effect on the
financial position and/or reputation of NatWest
Group or a loss of investor confidence.
NatWest Group may not be able to
adequately access sources of liquidity and
funding.
NatWest Group is required to access sources
of liquidity and funding through retail and
wholesale deposits, as well as through the
debt capital markets. As at 31 December
2020, NatWest Group plc held £452.3 billion
in deposits. The level of deposits may
fluctuate due to factors outside NatWest
Group’s control, such as a loss of investor
confidence (including in individual NatWest
Group entities), sustained low or negative
interest rates, increasing competitive
pressures for retail and corporate customer
deposits or the reduction or cessation of
deposits by wholesale depositors, which could
result in a significant outflow of deposits within
a short period of time. An inability to grow or
any material decrease in NatWest Group’s
deposits could, particularly if accompanied by
one of the other factors described above,
materially affect NatWest Group’s ability to
satisfy its liquidity or funding needs. In turn,
this could require NatWest Group to adapt its
funding plans.
As at 31 December 2020, NatWest Group
plc’s liquidity coverage ratio was 165%. If its
liquidity position were to come under stress,
and if NatWest Group plc were unable to raise
funds through deposits or in the debt capital
markets on acceptable terms or at all, its
liquidity position could be adversely affected
and it might be unable to meet deposit
withdrawals on demand or at their contractual
maturity, to repay borrowings as they mature,
to meet its obligations under committed
financing facilities, to comply with regulatory
funding requirements, to undertake certain
capital and/or debt management activities, or
to fund new loans, investments and
businesses. NatWest Group may need to
liquidate unencumbered assets to meet its
liabilities, including disposals of assets not
previously identified for disposal to reduce its
funding commitments or trigger the execution
of certain management actions or recovery
options. In a time of reduced liquidity,
NatWest Group may be unable to sell some of
its assets, or may need to sell assets at
depressed prices, which in either case could
negatively affect NatWest Group’s results.
Any reduction in the credit rating and/or
outlooks assigned to NatWest Group plc,
any of its subsidiaries or any of their
respective debt securities could adversely
affect the availability of funding for
NatWest Group, reduce NatWest Group’s
liquidity position and increase the cost of
funding.
Rating agencies regularly review NatWest
Group plc and other NatWest Group entity
credit ratings and outlooks, which could be
negatively affected by a number of factors that
can change over time, including: the credit
rating agency’s assessment of NatWest
Group’s strategy and management’s
capability; its financial condition including in
respect of profitability, asset quality, capital,
funding and liquidity; the level of political
support for the industries in which NatWest
Group operates; the implementation of
structural reform; the legal and regulatory
frameworks applicable to NatWest Group’s
legal structure; business activities and the
rights of its creditors; changes in rating
methodologies; changes in the relative size of
the loss-absorbing buffers protecting
bondholders and depositors; the competitive
environment, political and economic
conditions in NatWest Group’s key markets
(including the impact of the COVID-19
pandemic, Brexit and any further Scottish
independence referendum); any reduction of
the UK’s sovereign credit rating and market
uncertainty.
In addition, credit ratings agencies are
increasingly taking into account sustainability-
related factors, including climate,
environmental, social and governance related
risk, as part of the credit ratings analysis, as
are investors in their investment decisions.
Any reductions in the credit ratings of
NatWest Group plc or of certain other
NatWest Group entities, including, in
particular, downgrades below investment
grade, or a deterioration in the capital
markets’ perception of NatWest Group’s
financial resilience could significantly affect
NatWest Group’s access to money markets,
reduce the size of its deposit base and trigger
additional collateral or other requirements in
derivatives contracts and other secured
funding arrangements or the need to amend
such arrangements, which could adversely
affect NatWest Group’s (and, in particular,
NatWest Group plc’s) cost of funding and its
access to capital markets and could limit the
range of counterparties willing to enter into
transactions with NatWest Group (and, in
particular, with NatWest Group plc). This
could in turn adversely impact NatWest
Group’s competitive position and threaten its
prospects in the short to medium-term.
NatWest Group may be adversely affected
if it fails to meet the requirements of
regulatory stress tests.
NatWest Group is subject to annual stress
tests by its regulator in the UK and is also
subject to stress tests by European regulators
with respect to NatWest Group plc, NWM N.V.
and Ulster Bank Ireland DAC. Stress tests are
designed to assess the resilience of banks to
potential adverse economic or financial
developments and ensure that they have
robust, forward-looking capital planning
processes that account for the risks
associated with their business profile. If the
stress tests reveal that a bank’s existing
regulatory capital buffers are not sufficient to
absorb the impact of the stress, then it is
possible that the bank will need to take action
to strengthen its capital position.
Failure by NatWest Group to meet the
quantitative and qualitative requirements of
the stress tests as set forth by its UK regulator
or those elsewhere may result in: NatWest
Group’s regulators requiring NatWest Group
to generate additional capital, reputational
damage, increased supervision and/or
regulatory sanctions, restrictions on capital
distributions and loss of investor confidence.
NatWest Group could incur losses or be
required to maintain higher levels of
capital as a result of limitations or failure
of various models.
Given the complexity of NatWest Group’s
business, strategy and capital requirements,
NatWest Group relies on analytical models for
a wide range of purposes, including to
manage its business, assess the value of its
assets and its risk exposure, as well as to
anticipate capital and funding requirements
(including to facilitate NatWest Group’s
mandated stress testing). In addition, NatWest
Group utilises models for valuations, credit
approvals, calculation of loan impairment
charges on an IFRS 9 basis, financial
reporting and for financial crime and fraud risk
management. NatWest Group’s models, and
the parameters and assumptions on which
they are based, are periodically reviewed and
updated to maximise their accuracy.
As models analyse scenarios based on
assumed inputs and a conceptual approach,
model outputs therefore remain uncertain and
should not be relied on. Failure of models
(including due to errors in model design) or
new data inputs, including to accurately reflect
changes in the micro and macroeconomic
environment in which NatWest Group
operates (for example to account for the
impact of the COVID-19 pandemic), to
capture risks and exposures at the subsidiary
level and to update for changes to NatWest
Group’s current business model or operations,
or for findings of deficiencies by NatWest
Group’s regulators (including as part of
NatWest Group’s mandated stress testing),
may result in increased capital requirements
or require management action. NatWest
Group may also face adverse consequences
as a result of actions based on models that
are poorly developed, implemented or used,
models that are based on inaccurate or
compromised data or as a result of the
modelled outcome being misunderstood, or by
such information being used for purposes for
which it was not designed.
NatWest Group’s financial statements are
sensitive to the underlying accounting
policies, judgments, estimates and
assumptions.
The preparation of financial statements
requires management to make judgments,
estimates and assumptions that affect the
reported amounts of assets, liabilities, income,
expenses, exposures and RWAs. While
estimates, judgments and assumptions take
into account historical experience and other
factors, (including market practice and
expectations of future events that are believed
NatWest Group Annual Report and Accounts 2020
353
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
to be reasonable under the circumstances),
actual results may differ due to the inherent
uncertainty in making estimates, judgments
and assumptions (particularly those involving
the use of complex models). See also,
‘NatWest Group’s results could be adversely
affected if the effects of the COVID-19
pandemic or other events trigger the
recognition of a goodwill impairment’.
The accounting policies deemed critical to
NatWest Group’s results and financial
position, based upon materiality and
significant judgments and estimates, which
include loan impairment provisions, are set
out in ‘Critical accounting policies and key
sources of estimation uncertainty’ on page
269. New accounting standards and
interpretations that have been issued by the
International Accounting Standards Board but
which have not yet been adopted by NatWest
Group are discussed in ‘Accounting
developments’ on page 269.
Changes in accounting standards may
materially impact NatWest Group’s
financial results.
Changes in accounting standards or guidance
by accounting bodies or in the timing of their
implementation, whether immediate or
foreseeable, could result in NatWest Group
having to recognise additional liabilities on its
balance sheet, or in further write-downs or
impairments to its assets and could also
significantly impact the financial results,
condition and prospects of NatWest Group.
The valuation of financial instruments,
including derivatives, measured at fair value
can be subjective, in particular where models
are used which include unobservable inputs.
Generally, to establish the fair value of these
instruments, NatWest Group relies on quoted
market prices or, where the market for a
financial instrument is not sufficiently credible,
internal valuation models that utilise
observable market data. In certain
circumstances, the data for individual financial
instruments or classes of financial instruments
utilised by such valuation models may not be
available or may become unavailable due to
prevailing market conditions. In these
circumstances, NatWest Group’s internal
valuation models require NatWest Group to
make assumptions, judgments and estimates
to establish fair value, which are complex and
often relate to matters that are inherently
uncertain.
The value or effectiveness of any credit
protection that NatWest Group has
purchased depends on the value of the
underlying assets and the financial
condition of the insurers and
counterparties.
NatWest Group has some remaining credit
exposure arising from over-the-counter
derivative contracts, mainly credit default
swaps (CDSs), and other credit derivatives,
each of which are carried at fair value. The
fair value of these CDSs, as well as NatWest
Group’s exposure to the risk of default by the
underlying counterparties, depends on the
valuation and the perceived credit risk of the
instrument against which protection has been
bought. Many market counterparties have
been adversely affected by their exposure to
residential mortgage-linked and corporate
credit products, whether synthetic or
otherwise, and their actual and perceived
creditworthiness may deteriorate rapidly. If the
financial condition of these counterparties or
their actual or perceived creditworthiness
deteriorates, NatWest Group may record
further credit valuation adjustments on the
credit protection bought from these
counterparties under the CDSs. NatWest
Group also recognises any fluctuations in the
fair value of other credit derivatives. Any such
adjustments or fair value changes may have a
negative impact on NatWest Group’s results.
NatWest Group may become subject to the
application of UK statutory stabilisation or
resolution powers which may result in,
among other actions, the cancellation,
transfer or dilution of ordinary shares, or
the write-down or conversion of certain
other of NatWest Group’s securities.
HM Treasury, the Bank of England and the
PRA and FCA (together, the ‘Authorities’) are
granted substantial powers to resolve and
stabilise UK-incorporated financial institutions.
Five stabilisation options exist: (i) transfer of
all of the business of a relevant entity or the
shares of the relevant entity to a private sector
purchaser; (ii) transfer of all or part of the
business of the relevant entity to a ‘bridge
bank’ wholly-owned by the Bank of England;
(iii) transfer of part of the assets, rights or
liabilities of the relevant entity to one or more
asset management vehicles for management
of the transferor’s assets, rights or liabilities;
(iv) the write-down, conversion, transfer,
modification, or suspension of the relevant
entity’s equity, capital instruments and
liabilities; and (v) temporary public ownership
of the relevant entity. These tools may be
applied to NatWest Group plc as the parent
company or an affiliate where certain
conditions are met (such as, whether the firm
is failing or likely to fail, or whether it is
reasonably likely that action will be taken
(outside of resolution) that will result in the
firm no longer failing or being likely to fail).
Moreover, there are modified insolvency and
administration procedures for relevant entities,
and the Authorities have the power to modify
or override certain contractual arrangements
in certain circumstances and amend the law
for the purpose of enabling their powers to be
used effectively and may promulgate
provisions with retrospective applicability.
Under the UK Banking Act, the Authorities are
generally required to have regard to specified
objectives in exercising the powers provided
for by the Banking Act. One of the objectives
(which is required to be balanced as
appropriate with the other specified
objectives) refers to the protection and
enhancement of the stability of the financial
system of the UK. Moreover, the ‘no creditor
worse off’ safeguard contained in the Banking
Act may not apply in relation to an application
of the separate write-down and conversion
power relating to capital instruments under the
Banking Act, in circumstances where a
stabilisation power is not also used. Holders
of debt instruments which are subject to the
power may, however, have ordinary shares
transferred to or issued to them by way of
compensation.
Uncertainty exists as to how the Authorities
may exercise their powers including the
determination of actions undertaken in relation
to the ordinary shares and other securities of
NatWest Group, which may depend on factors
outside of NatWest Group’s control.
Moreover, the Banking Act provisions remain
untested in practice.
If NatWest Group is at or is approaching the
point of non-viability such that regulatory
intervention is required, any exercise of the
resolution regime powers by the Authorities
may adversely affect holders of NatWest
Group plc’s ordinary shares or other NatWest
Group securities. This may result in various
actions being undertaken in relation to
NatWest Group and any securities of NatWest
Group, including cancellation, transfer,
dilution, write-down or conversion (as
applicable). There may also be a
corresponding adverse effect on the market
price of such securities.
Climate and sustainability-related risks
NatWest Group and its customers may
face significant climate-related risks,
including in transitioning to a low-carbon
economy, which may adversely impact
NatWest Group.
Climate-related risks and uncertainties are
receiving increasing prudential and regulatory,
political and societal scrutiny, both in the UK
and internationally.
Financial risks from climate change arise
through two primary channels, or ‘risk factors’:
physical and transition.
There are significant uncertainties as to the
extent and timing of the manifestation of the
physical risks of climate change, such as
more extreme and frequent weather events,
rising sea levels, flooding, and subsidence,
heat waves and long-lasting wildfires,
reductions in biodiversity and resource
scarcity. Damage to the properties and
operations of borrowers could impair asset
values, business activities and the
creditworthiness of customers leading to
increased default rates, delinquencies, write-
offs and impairment charges in NatWest
Group’s portfolios. In addition, NatWest
Group’s premises and resilience may also
suffer physical damage due to weather events
leading to increased costs and disruption of
activity and business continuity for NatWest
Group.
There are also significant uncertainties
regarding the timing and speed of the
transition to a low-carbon economy occurs
and whether it occurs in an earlier, gradual,
orderly manner or a delayed, rapid, disorderly
manner. Widespread levels of adjustment to a
low-carbon economy across all sectors of the
economy and markets in which NatWest
Group operates will be required by several
multilateral agreements, in particular the 2015
NatWest Group Annual Report and Accounts 2020
354
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
Paris Agreement and the UK and Scottish
Government commitments to achieving net
zero carbon emissions by 2050 and 2045.
Some sectors such as property, energy
(including oil and gas), mining, infrastructure,
transport (including automotive and aviation)
and agriculture are expected to be particularly
impacted. The nature and timing of the far-
reaching commercial, technological, policy
and regulatory changes that this transition will
entail remain uncertain but their impact is
expected to be highly significant and may be
disruptive, especially if these changes do not
occur in an orderly or timely manner or are not
effective in reducing emissions sufficiently.
Furthermore, public and private sector
institutions may also face a variety of climate-
related legal risks, both physical and
transition, from potential litigation and contract
liability. See also, ‘NatWest Group may be
subject to potential climate, environmental
and other sustainability-related litigation,
enforcement proceedings, investigations and
conduct risk’.
If NatWest Group fails, either to take the
extent of action required or in the timeliness of
the action taken, to adapt its business and
operating model to the climate-related risks
and opportunities and changing market
expectations, or to appropriately identify,
measure, manage and mitigate climate
change related physical and transition risks
and opportunities that NatWest Group and its
customers face, NatWest Group’s reputation,
business, results of operations and outlook
may be impacted adversely.
NatWest Group’s Purpose-led Strategy
includes one area of focus on climate
change that is likely to require material
changes to the business of NatWest Group
which entails significant execution risk.
In February 2020, NatWest Group announced
its ambition to become the leading bank on
climate in the UK and ROI, helping to address
the climate challenge by setting itself the
challenge to at least halve the climate impact
of its financing activity by 2030 and by
intending to do what is necessary to achieve
alignment with the 2015 Paris Agreement.
NatWest Group’s commitment to reduce the
climate impact of its financing activities may
materially affect NatWest Group’s business
and operations and will require significant
reductions to its financed emissions and to its
exposure to customers that do not align with a
transition to a low-carbon economy or do not
have a credible transition plan. It is anticipated
that, these reductions, together with the active
management of climate-related risks and
other regulatory, policy and market changes,
are likely to necessitate material and
accelerated changes to NatWest Group’s
business and existing exposures (potentially
on timescales outside of risk appetite) which
may have a material adverse effect on
NatWest Group’s ability to achieve its
associated financial targets and generate
sustainable returns.
increasingly requiring significant resource and
capacity to collect third party, customer and
other data and to develop and apply
methodologies to understand and measure
the climate impact of the emissions related to
its financing activities. There is currently no
single standard approach or methodology to
measure such emissions and to provide a
scenario-based model for alignment with the
objectives of the 2015 Paris Agreement and
the data, methodologies and assumptions on
which emissions estimates and targets are
based are also subject to change.
Accordingly, NatWest Group must continue to
identify, define and develop its approach to
setting and publishing sector-specific targets
and its goal of setting comprehensive climate
impact scenario-based reduction targets and
plans by 2022. It must also be able to
adequately define and benchmark current
climate impact from its financing activities to
demonstrate its progress against its ambition
to halve this impact by 2030.
NatWest Group’s ability to meet its climate-
related targets and commitments – including
to at least halve the climate impact of its
financing activity - will depend greatly on
many factors beyond NatWest Group’s
control. These include the macroeconomic
environment, the extent and pace of climate
change, including the timing and
manifestation of physical and transition risks
and the effectiveness of actions of
governments, legislators, regulators,
businesses, investors, customers and other
stakeholders to adapt and/or mitigate the
impact of climate-related risks. See also,
‘NatWest Group is currently implementing its
Purpose-led Strategy, which carries significant
execution and operational risks and may not
achieve its stated aims and targeted
outcomes’.
Any delay or failure in setting, making
progress against or meeting NatWest Group’s
climate-related targets and commitments may
have a material adverse impact on NatWest
Group, its reputation, business, results of
operations, outlook, market and competition
position and may increase the climate-related
risks NatWest Group faces.
Any failure by NatWest Group to
implement effective and compliant climate
change resilient systems, controls and
procedures could adversely affect NatWest
Group’s ability to manage climate-related
risks.
The prudential regulation of climate-related
risks is an important driver in how NatWest
Group develops its risk appetite for financing
activities or engaging with counterparties that
do not align with a transition to a low-carbon
economy or do not have a credible transition
plan.
Legislative and regulatory authorities in the
UK and in the European Union are publishing
expectations as to how banks should
prudently manage and transparently disclose
climate-related and environmental risks under
prudential rules. In November 2020, the
European Central Bank published its ‘Guide
on climate-related and environmental risks’
and in April 2019, the PRA published a
supervisory statement ‘Enhancing banks’ and
insurers’ approaches to managing the
financial risks from climate change’ (the ‘SS
3/19’).
In the SS 3/19 the PRA states that regulated
entities must:
•
•
fully embed the consideration of the
financial risks from climate change in
their governance arrangements;
incorporate the financial risks from
climate change into existing financial
risk management practice;
• use (long term) scenario analysis to
inform strategy setting and risk
assessment and identification; and
• develop an approach to disclosure on
the financial risks from climate change.
Following the submission of initial plans by UK
banks, in July 2020 the PRA issued a ‘Dear
CEO’ letter requiring firms to embed fully their
approaches to managing climate-related
financial risks by the end of 2021. In
response, NatWest Group provided the PRA
on 8 October 2020 with an update to its
original plan submitted in October 2019. The
updated plan stated that the COVID-19
pandemic had disrupted some elements of
NatWest Group’s original plan and, as a
result, some near term activities have been
delayed to 2021; this delay could potentially
result in increased execution risk. Further, the
updated plan advised that it will require
additional operating cycles reaching into 2022
and beyond to prove embedding.
In December 2019 the Bank of England
announced that it will use the 2021 biennial
exploratory scenario to stress test the
resilience of the current business models of
the largest banks, insurers and the financial
system to the physical and transition risks
from climate change under a number of
climate scenarios (the ‘Climate Biennial
Explanatory Scenario’ or ‘CBES’). Further, in
December 2020 the Bank of England
published an update on its approach to the
CBES in selected areas and confirmed that
the CBES, which will be exploratory in nature
(i.e. not intended to be used to set capital
requirements), will be launched in early June
2021. There is a risk, however, that in the
future years once the climate analytics have
been embedded via the CBES, it may be
concluded by the regulator that financial
institutions, including NatWest Group, may be
required to hold additional capital to enhance
their resilience against systemic and/or
institution specific vulnerabilities to climate-
related risks, including potential asset
devaluation shocks.
Any failure of NatWest Group to fully and
timely embed climate-related risks into its risk
management practices and framework to
appropriately identify, measure, manage and
mitigate the various climate-related physical
and transition risks in line with applicable legal
and regulatory requirements and
expectations, may have a material and
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Furthermore, the ongoing implementation of
NatWest Group’s climate strategy is
NatWest Group Annual Report and Accounts 2020
355
Risk factors
adverse impact on NatWest Group’s
regulatory compliance, prudential capital
requirements, liquidity position, reputation,
business, results of operations and outlook.
There are significant uncertainties inherent
in accurately modelling the impact of
climate-related risks.
Significant risks, uncertainties and variables
are inherent in the assessment, measurement
and mitigation of climate-related risks. These
include data quality gaps and limitations, the
pace at which climate science, greenhouse
gas accounting standards and carbon capture
and other emissions reduction solutions
develop. In addition, multiple climate change
scenarios dependent on a range of variable
factors could unfold over the coming two or
three decades, which timeframes are
considerably longer than NatWest Group’s
historical strategic, financial, resilience and
investment planning horizons and which will
affect how and when climate-related risks
manifest.
As a result, it is very difficult to predict and
model the impact of climate-related risks into
precise financial and economic outcomes and
impacts. Climate-related risks present
significant methodological challenges due to
their forward-looking nature, the lack of
historical testing capabilities, the quality, lack
of standardisation and incompleteness of
emissions and other climate and sub-sector
related data and the immature nature of risk
measurement and modelling methodologies.
The evaluation of climate-related risk
exposure and the development of associated
potential risk mitigation techniques largely
depend on the choice of climate scenario
modelling methodology and the assumptions
made.
There are a number of risks and uncertainties
involved in climate scenario modelling,
including that:
•
it requires a special skill set that banks
traditionally do not have and therefore
NatWest Group needs to rely on third
party advice, modelling, and data which
is also subject to many limitations and
uncertainties;
• modelling of and data on climate-
related risks on financial assets is
immature in nature and it is expected
that techniques and understanding will
evolve rapidly in the coming years;
•
•
it is challenging to benchmark or back
test the climate scenarios given their
forward-looking nature and the multiple
possible outcomes;
there is significant uncertainty as to how
the climate will evolve over the coming
decades, how and when governments,
regulators, businesses, investors and
customers respond and how those
responses impact the economy, asset
valuations, land systems, energy
systems, technology, policy and wider
society.
Accordingly, these risks and uncertainties
coupled with significantly longer timeframes
make the outputs of climate-related risk
modelling, including emissions reductions
targets and pathways, inherently more
unreliable than outputs modelled for traditional
financial planning cycles based on historical
financial information.
Capabilities within NatWest Group to assess
the suitability of the assumptions required to
model and manage climate-related risks
appropriately are developing. Even when
those capabilities are developed, the high
level of uncertainty regarding any
assumptions modelled, the highly subjective
nature of risk measurement and mitigation
techniques, incorrect or inadequate
assumptions and judgments and data quality
gaps and limitations may lead to inadequate
risk management information and
frameworks, or ineffective business
adaptation or mitigation strategies, which may
have a material adverse impact on NatWest
Group’s regulatory compliance, reputation,
business, results of operations and outlook.
A failure to adapt NatWest Group’s
business strategy, governance,
procedures, systems and controls to
manage emerging sustainability-related
risks and opportunities may have a
material adverse effect on NatWest
Group’s reputation, business, results of
operations and outlook.
Investors, customers, international
organisations, regulators and other
stakeholders are increasingly focusing on and
encouraging businesses to (i) identify,
measure, manage and mitigate environmental
(biodiversity and loss of natural capital); social
(such as tackling inequality, inclusion, human
rights and working conditions); and
governance (such as board diversity, ethics,
executive compensation and management
structure) related risks and opportunities –
which together are commonly referred to as
‘sustainability-related’ related risks and
opportunities; and (ii) focus on long term
sustainable value creation rather than short-
term financial value.
In addition to climate-related risks,
sustainability-related risks such as
environmental degradation may also
adversely affect economic activity, asset
pricing and valuations of issuers’ securities
and, in turn, the wider financial system. There
is also evidence of an interconnection
between climate-related and sustainability-
related risks resulting in combined effects
capable of potentially generating even greater
adverse effects. Sustainability-related risks
may impact economic activities directly (for
example through lower corporate profitability
or the devaluation of assets) or indirectly (for
example through macro-financial changes).
They may also affect the viability or resilience
of business models over the medium to longer
term, particularly those business models most
vulnerable to sustainability-related risks. In
addition, sustainability-related risks can trigger
further losses stemming directly or indirectly
from legal claims (liability risks) and
reputational damage as a result of the public,
customers, counterparties and/or investors
associating NatWest Group or its customers
with adverse sustainability-related issues.
Furthermore, sustainability-related risks may
be drivers of several different risk categories
simultaneously and may exacerbate existing
risks, including credit risk, operational risk
(business continuity), market risk (both current
market risk positions and future investments)
and liquidity risk (for example, net cash
outflows or depletion of liquidity buffers), as
well as migration risk, credit spread risk in the
banking book, real estate risks and strategic
risk.
Accordingly, any failure to adapt NatWest
Group’s business strategy and to establish
and maintain effective governance,
procedures, systems and controls to manage
emerging sustainability-related risks and
opportunities may have a material adverse
effect on NatWest Group’s reputation, liquidity
position, business, results of operations and
outlook.
Any reduction in the ESG ratings of
NatWest Group could have a negative
impact on NatWest Group’s reputation and
on investors’ risk appetite.
Ratings from ESG rating agencies and data
providers that rate on an unsolicited basis as
to how NatWest Group manages
environmental, social and governance risks
are increasingly influencing investment
decisions. Any change in such ESG ratings
depends on many factors some of which are
beyond NatWest Group’s control (e.g. any
change in rating methodology). Any reduction
in the ESG ratings of NatWest Group could
have a negative impact on NatWest Group’s
reputation and could influence investors’ risk
appetite for NatWest Group’s and/or its
subsidiaries’ securities, particularly ESG
securities.
Increasing levels of climate, environmental
and sustainability-related laws, regulation
and oversight may adversely affect
NatWest Group’s business and expose
NatWest Group to increased costs of
compliance, regulatory sanction and
reputational damage.
Governments, legislative and regulatory
authorities in the UK, EU and elsewhere are
increasingly prioritising a wide range of new
climate, environmental and sustainability-
related laws and regulations to address the
risks and opportunities associated with
climate change and sustainability and to
promote the transition to a more sustainable
low-carbon economy. As a result, an
increasing number of laws, regulations,
legislative actions are likely to affect the
financial sector and the real economy,
including proposals, guidance, policy and
regulatory initiatives many of which have been
introduced or amended recently and are
subject to further changes.
Many of these initiatives are focused on
disclosure, developing standardised
definitions for green and sustainable criteria of
assets and liabilities, integrating climate
change and sustainability into decision-
making and customers access to green and
NatWest Group Annual Report and Accounts 2020
356
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
sustainable financial products and services,
which may have a significant impact on the
services provided by NatWest Group and its
subsidiaries, especially mortgage lending, and
its associated credit, market and financial risk
profile. They could also impact NatWest
Group’s recognition of its climate financing
activity and may adversely affect NatWest
Group’s achieving its climate strategy and
sustainable financing ambitions.
In addition, NatWest Group’s EU subsidiaries
will continue to be subject to an increasing
array of the EU/EEA climate and
sustainability-related legal and regulatory
requirements, such as the EU Taxonomy and
EU Green Bond Standards. These
requirements may be used as the basis for
UK laws and regulations (such as the recently
announced UK Green Taxonomy) or regarded
by investors and regulators as best practice
standards whether or not they apply to UK
businesses. Any divergence between EU/EEA
and UK requirements may result in NatWest
Group not meeting investors’ expectations,
may increase the cost of doing business and
may restrict access of NatWest Group’s UK
business to the EU/EEA market.
In addition, NatWest Group and its
subsidiaries will be subject to increasing entity
wide climate and other non-financial
disclosures requirements. From February
2022, NatWest Group will be required to
provide enhanced climate-related disclosures
consistent with the Task Force on Climate-
related Financial Disclosure (‘TCFD’)
recommendations to comply with the FCA’s
proposed new stock exchange listing rules for
premium listed companies. The FCA will
consult on expanding this requirement to a
wider scope of listed issuers in NatWest
Group as it moves towards mandatory TCFD
reporting across the UK economy by 2025.
NatWest Group is also participating in various
voluntary carbon reporting and other standard
setting initiatives for disclosing climate and
sustainability-related information, many of
which have differing objectives and
methodologies and are at different stages of
development in terms of how they apply to
financial institutions.
These developing and evolving climate and
sustainability-related requirements are likely
to require NatWest Group to implement
significant changes to its business models,
product and other governance, internal
controls over financial reporting, disclosure
controls and procedures, modelling capability
and risk management systems, which may
increase the cost of doing business, entail
additional change risk and compliance costs.
Failure to implement and comply with these
requirements or adopt regulatory or other best
practice expectations may have a material
adverse effect on NatWest Group’s regulatory
compliance and may result in regulatory
sanction and investor disapproval.
NatWest Group may be subject to potential
climate, environmental and other
sustainability-related litigation,
enforcement proceedings, investigations
and conduct risk.
Due the increasing number of new climate
and sustainability-related laws and
regulations, growing demand from investors
and customers for environmentally
sustainable products and services, and
regulatory scrutiny, financial institutions,
including NatWest Group, may through their
business activities face increasing litigation,
conduct, enforcement and contract liability
risks related to climate change, environmental
degradation and other social, governance and
sustainability-related issues.
Furthermore, there is a risk that shareholders,
campaign groups, customers and special
interest groups could seek to take legal action
against NatWest Group for financing or
contributing to climate change and
environmental degradation.
These potential litigation, conduct,
enforcement and contract liability risks may
have a material adverse effect on NatWest
Group’s ability to achieve its strategy,
including its climate ambition, as well as its
reputation, business, results of operations and
outlook.
Operational and IT resilience risk
Operational risks (including reliance on
third party suppliers and outsourcing of
certain activities) are inherent in NatWest
Group’s businesses.
Operational risk is the risk of loss resulting
from inadequate or failed internal processes,
procedures, people or systems, or from
external events, including legal risks. It has
come under increasing regulatory focus in
recent years. NatWest Group operates in
many countries, offering a diverse range of
products and services supported by 59,900
employees as at 31 December 2020; it
therefore has complex and diverse
operations. As a result, operational risks or
losses can arise from a number of internal or
external factors (including financial crime).
These risks are also present when NatWest
Group relies on third-party suppliers or
vendors to provide services to it or its
customers, as is increasingly the case as
NatWest Group outsources certain activities,
including with respect to the implementation of
new technologies, innovation and responding
to regulatory and market changes.
Operational risks continue to be heightened
as a result of the implementation of NatWest
Group’s Purpose-led Strategy, including the
refocusing of its NWM franchise, NatWest
Group’s phased withdrawal from ROI,
NatWest Group’s current cost-reduction
measures and conditions affecting the
financial services industry generally (including
the COVID-19 pandemic, Brexit and other
geo-political developments) as well as the
legal and regulatory uncertainty resulting
therefrom. It is unclear as to how the future
ways of working may evolve, including in
respect of how working practices may
develop, or how NatWest Group will evolve to
357
best serve its customers. Any of the above
may place significant pressure on NatWest
Group’s ability to maintain effective internal
controls and governance frameworks.
The effective management of operational risks
is critical to meeting customer service
expectations and retaining and attracting
customer business. Although NatWest Group
has implemented risk controls and mitigation
actions, with resources and planning having
been devoted to mitigate operational risk,
such measures may not be effective in
controlling each of the operational risks faced
by NatWest Group. Ineffective management
of such risks could adversely affect NatWest
Group.
NatWest Group is subject to increasingly
sophisticated and frequent cyberattacks.
NatWest Group experiences a constant threat
from cyberattacks across the entire NatWest
Group and against NatWest Group’s supply
chain, re-enforcing the importance of due
diligence of and close working relationship
with the third parties on which NatWest Group
relies. NatWest Group is reliant on
technology, against which there is a
constantly evolving series of attacks that are
increasing in terms of frequency,
sophistication, impact and severity. As
cyberattacks evolve and become more
sophisticated, NatWest Group is required to
continue to invest in additional capability
designed to defend against the emerging
threats. In 2020, NatWest Group was
subjected to a small number of Distributed
Denial of Service (‘DDOS’) attacks, which are
a pervasive and significant threat to the global
financial services industry. The focus is to
manage the impact of the attacks and sustain
availability of services for NatWest Group’s
customers. NatWest Group continues to
invest significant resources in the
development and evolution of cyber security
controls that are designed to minimise the
potential effect of such attacks.
Hostile attempts are made by third parties to
gain access to, introduce malware (including
ransomware) into and exploit vulnerabilities
of, NatWest Group’s IT systems. NatWest
Group has information and cyber security
controls in place to minimise the impact of any
attack, which are subject to review on a
continuing basis but given the nature of the
threat, there can be no assurance that such
measures will prevent all attacks in the future.
See also, ‘NatWest Group’s operations are
highly dependent on its complex IT systems
(including those that enable remote working)
and any IT failure could adversely affect
NatWest Group’.
Any failure in NatWest Group’s cybersecurity
policies, procedures or controls, may result in
significant financial losses, major business
disruption, inability to deliver customer
services, or loss of data or other sensitive
information (including as a result of an
outage) and may cause associated
reputational damage. Any of these factors
could increase costs (including costs relating
to notification of, or compensation for
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
NatWest Group Annual Report and Accounts 2020
Risk factors
customers, credit monitoring or card
reissuance), result in regulatory investigations
or sanctions being imposed or may affect
NatWest Group’s ability to retain and attract
customers. Regulators in the UK, US, Europe
and Asia continue to recognise cybersecurity
as an increasing systemic risk to the financial
sector and have highlighted the need for
financial institutions to improve their
monitoring and control of, and resilience
(particularly of critical services) to
cyberattacks, and to provide timely notification
of them, as appropriate.
Additionally, third parties may also
fraudulently attempt to induce employees,
customers, third party providers or other users
who have access to NatWest Group’s
systems to disclose sensitive information in
order to gain access to NatWest Group’s data
or that of NatWest Group’s customers or
employees. Cyber security and information
security events can derive from groups or
factors such as: internal or external threat
actors, human error, fraud or malice on the
part of NatWest Group’s employees or third
parties, including third party providers, or may
result from accidental technological failure.
NatWest Group expects greater regulatory
engagement, supervision and enforcement to
continue at a high level in relation to its overall
resilience to withstand IT and related
disruption, either through a cyberattack or
some other disruptive event. Such increased
regulatory engagement, supervision and
enforcement is uncertain in relation to scope,
consequence and pace of change, which
could negatively impact NatWest Group. Due
to NatWest Group’s reliance on technology
and the increasing sophistication, frequency
and impact of cyberattacks, it is likely that
such attacks could have a material adverse
impact on NatWest Group.
In accordance with the EU General Data
Protection Regulation (‘GDPR’) and European
Banking Authority (‘EBA’) Guidelines on ICT
and Security Risk Management, NatWest
Group is required to ensure it implements
timely, appropriate and effective
organisational and technological safeguards
against unauthorised or unlawful access to
the data of NatWest Group, its customers and
its employees. In order to meet this
requirement, NatWest Group relies on the
effectiveness of its internal policies, controls
and procedures to protect the confidentiality,
integrity and availability of information held on
its IT systems, networks and devices as well
as with third parties with whom NatWest
Group interacts. A failure to monitor and
manage data in accordance with the GDPR
and EBA requirements of the applicable
legislation may result in financial losses,
regulatory fines and investigations and
associated reputational damage.
NatWest Group operations and strategy
are highly dependent on the accuracy and
effective use of data.
NatWest Group relies on the effective use of
accurate data to support, monitor, evaluate,
manage and enhance its operations and
deliver its strategy. The availability of current,
detailed, accurate and, wherever possible,
machine-readable customer segment and
sub-sector data is fast becoming a critical
strategic asset. Failure to have current, high-
quality data and/or the ineffective use of such
data could result in a failure to manage and
report important risks and opportunities or
satisfy customers’ expectations including the
inability to deliver innovative products and
services. This could also result in a failure to
deliver NatWest Group’s strategy and could
place the NatWest Group at a competitive
disadvantage by increasing its costs, inhibiting
its efforts to reduce costs or its ability to
improve its systems, controls and processes,
which could result in a failure to deliver
NatWest Group’s strategy. These data
limitations or the unethical or inappropriate
use of data and/or non-compliance with
customer data and privacy protection laws
could give rise to conduct and litigation risks
and may increase the risk of operational
events, losses or other adverse
consequences due to inappropriate models,
systems, processes, decisions or other
actions.
NatWest Group’s operations are highly
dependent on its complex IT systems
(including those that enable remote
working) and any IT failure could adversely
affect NatWest Group.
NatWest Group’s operations are highly
dependent on the ability to process a very
large number of transactions efficiently and
accurately while complying with applicable
laws and regulations. The proper functioning
of NatWest Group’s payment systems,
financial crime and sanctions controls, risk
management, credit analysis and reporting,
accounting, customer service and other IT
systems, as well as the communication
networks between its branches and main data
processing centres, is critical to NatWest
Group’s operations.
Individually or collectively, any critical system
failure, material loss of service availability or
material breach of data security could cause
serious damage to NatWest Group’s ability to
provide services to its customers, which could
result in reputational damage, significant
compensation costs or regulatory sanctions
(including fines resulting from regulatory
investigations) or a breach of applicable
regulations. In particular, such issues could
cause long-term damage to NatWest Group’s
reputation and could affect its regulatory
approvals, competitive position, business and
brands, which could undermine its ability to
attract and retain customers. This risk is
heightened as most of NatWest Group’s
employees are working remotely as a result of
the COVID-19 pandemic, as it outsources
certain functions and as it continues to
innovate and offer new digital solutions to its
customers as a result of the trend towards
online and mobile banking.
In 2020, NatWest Group continued to make
considerable investments to further simplify,
upgrade and improve its IT and technology
capabilities (including migration of certain
services to cloud platforms). NatWest Group
also continues to develop and enhance digital
NatWest Group Annual Report and Accounts 2020
358
services for its customers and seeks to
improve its competitive position through
enhancing controls and procedures and
strengthening the resilience of services
including cyber security. Any failure of these
investment and rationalisation initiatives to
achieve the expected results, due to cost-
challenges or otherwise, could negatively
affect NatWest Group’s operations, its
reputation and ability to retain or grow its
customer business or adversely impact its
competitive position, thereby negatively
impacting NatWest Group’s business, results
of operations and outlook.
NatWest Group relies on attracting,
retaining and developing senior
management and skilled personnel, and is
required to maintain good employee
relations.
NatWest Group’s success depends on its
ability to attract, retain and develop highly
skilled and qualified personnel, including
senior management, directors and key
employees especially for technology-focused
roles, in a highly competitive market and
under internal cost reduction pressures.
NatWest Group’s ability to do this may be
more difficult due to the cost reduction
pressures, including the refocusing of its
NWM franchise and the phased withdrawal
from ROI, heightened regulatory oversight of
banks and the increasing scrutiny of, and (in
some cases) restrictions placed upon,
employee compensation arrangements, in
particular those of banks in receipt of
government support such as NatWest Group.
This increases the cost of hiring, training and
retaining skilled personnel. In addition, certain
economic, market and regulatory conditions
and political developments (including Brexit)
may reduce the pool of candidates for key
management and non-executive roles,
including non-executive directors with the right
skills, knowledge and experience, or increase
the number of departures of existing
employees.
Any reduction of compensation, as a result of
the PRA’s request that bank boards consider
taking further appropriate action regarding
variable compensation, or negative economic
developments, could have an adverse effect
on NatWest Group’s ability to hire, retain and
engage well qualified employees, especially at
a senior level, which may have a material
adverse impact on the financial position and
prospects of NatWest Group.
Many of NatWest Group’s employees in the
UK, the ROI and continental Europe are
represented by employee representative
bodies, including trade unions. Engagement
with its employees and such bodies is
important to NatWest Group in maintaining
good employee relations. Any failure to do so
could impact NatWest Group’s ability to
operate its business effectively.
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
A failure in NatWest Group’s risk
management framework could adversely
affect NatWest Group, including its ability
to achieve its strategic objectives.
Risk management is an integral part of all of
NatWest Group’s activities and includes the
definition and monitoring of NatWest Group’s
risk appetite and reporting on NatWest
Group’s risk exposure and the potential
impact thereof on NatWest Group’s financial
condition. Financial risk management is highly
dependent on the use and effectiveness of
internal stress tests and models and
ineffective risk management may arise from a
wide variety of factors, including lack of
transparency or incomplete risk reporting,
unidentified conflicts or misaligned incentives,
lack of accountability control and governance,
lack of consistency in risk monitoring and
management or insufficient challenges or
assurance processes. Failure to manage risks
effectively could adversely impact NatWest
Group’s reputation or its relationship with its
regulators, customers, shareholders or other
stakeholders.
NatWest Group’s operations are inherently
exposed to conduct risks, which include
business decisions, actions or reward
mechanisms that are not responsive to or
aligned with NatWest Group’s regulatory
obligations, customers’ needs or do not reflect
NatWest Group’s customer-focused strategy,
ineffective product management, unethical or
inappropriate use of data, information
asymmetry, implementation and utilisation of
new technologies, outsourcing of customer
service and product delivery, the possibility of
mis-selling of financial products and
mishandling of customer complaints. Some of
these risks have materialised in the past and
ineffective management and oversight of
conduct risks may lead to further remediation
and regulatory intervention or enforcement.
NatWest Group’s businesses are also
exposed to risks from employee misconduct
including non-compliance with policies and
regulations, negligence or fraud (including
financial crimes), any of which could result in
regulatory fines or sanctions and serious
reputational or financial harm to NatWest
Group. These risks may be exacerbated when
most of NatWest Group’s employees work
remotely as a result of the COVID-19
pandemic, which places additional pressure
on NatWest Group’s ability to maintain
effective internal controls and governance
frameworks.
NatWest Group has been seeking to embed a
strong risk culture across the organisation and
has implemented policies and allocated new
resources across all levels of the organisation
to manage and mitigate conduct risk and
expects to continue to invest in its risk
management framework. However, such
efforts may not insulate NatWest Group from
future instances of misconduct and no
assurance can be given that NatWest Group’s
strategy and control framework will be
effective. Any failure in NatWest Group’s risk
management framework could negatively
affect NatWest Group and its financial
condition through reputational and financial
harm and may result in the inability to achieve
its strategic objectives for its customers,
employees and wider stakeholders.
NatWest Group’s operations are subject to
inherent reputational risk.
Reputational risk relates to stakeholder and
public perceptions of NatWest Group arising
from an actual or perceived failure to meet
stakeholder expectations, including with
respect to NatWest Group’s Purpose-led
Strategy and related targets, due to any
events, behaviour, action or inaction by
NatWest Group, its employees or those with
whom NatWest Group is associated. This
includes brand damage, which may be
detrimental to NatWest Group’s business,
including its ability to build or sustain business
relationships with customers, and may cause
low employee morale, regulatory censure or
reduced access to, or an increase in the cost
of, funding. Reputational risk may arise
whenever there is a material lapse in
standards of integrity, compliance, customer
or operating efficiency and may adversely
affect NatWest Group’s ability to attract and
retain customers. In particular, NatWest
Group’s ability to attract and retain customers
(particularly, corporate and retail depositors)
may be adversely affected by, amongst
others: negative public opinion resulting from
the actual or perceived manner in which
NatWest Group conducts or modifies its
business activities and operations, media
coverage (whether accurate or otherwise),
employee misconduct, NatWest Group’s
financial performance, IT systems failures or
cyberattacks, data breaches, financial crime,
the level of direct and indirect government
support, or the actual or perceived practices in
the banking and financial industry in general,
or a wide variety of other factors.
Modern technologies, in particular online
social networks and other broadcast tools that
facilitate communication with large audiences
in short time frames and with minimal costs,
may also significantly increase and accelerate
the impact of damaging information and
allegations.
Although NatWest Group has implemented a
Reputational Risk Policy to improve the
identification, assessment and management
of customers, transactions, products and
issues, which represent a reputational risk,
NatWest Group cannot be certain that it will
be successful in avoiding damage to its
business from reputational risk.
Legal, regulatory and conduct risk
NatWest Group’s businesses are subject
to substantial regulation and oversight,
which are constantly evolving and may
adversely affect NatWest Group.
NatWest Group is subject to extensive laws,
regulations, corporate governance practice
and disclosure requirements, administrative
actions and policies in each jurisdiction in
which it operates. Many of these have been
introduced or amended recently and are
subject to further material changes, which
may increase compliance and conduct risks,
particularly if EU/EEA and UK laws diverge
now that the Brexit transition period has
ended. NatWest Group expects government
and regulatory intervention in the financial
services industry to remain high for the
foreseeable future.
In recent years, regulators and governments
have focused on reforming the prudential
regulation of the financial services industry
and the manner in which the business of
financial services is conducted. Amongst
others, measures have included: enhanced
capital, liquidity and funding requirements,
implementation of the UK ring-fencing regime,
implementation and strengthening of the
recovery and resolution framework applicable
to financial institutions in the UK, the EU and
the US, financial industry reforms (including in
respect of MiFID II), corporate governance
requirements, restrictions on the
compensation of senior management and
other employees, enhanced data privacy and
IT resilience requirements, financial market
infrastructure reforms (including enhanced
data privacy and IT resilience requirements,
enhanced regulations in respect of the
provision of ‘investment services and
activities’), and increased regulatory focus in
certain areas, including conduct, consumer
protection and disputes regimes, anti-money
laundering, anti-corruption, anti-bribery, anti-
tax evasion, payment systems, sanctions and
anti-terrorism laws and regulations.
Other areas in which, and examples of where,
governmental policies, regulatory and
accounting changes, and increased public
and regulatory scrutiny could have an adverse
impact (some of which could be material) on
NatWest Group include, but are not limited to,
the following:
• general changes in government, central
bank, regulatory or competition policy,
or changes in regulatory regimes that
may influence investor decisions in the
jurisdictions in which NatWest Group
operates;
•
•
rules relating to foreign ownership,
expropriation, nationalisation and
confiscation of assets;
increased attention to the protection
and resilience of, and competition and
innovation in, UK payment systems and
retail banking developments relating to
the UK initiative on Open Banking,
Open Finance and the European
directive on payment services;
• new or increased regulations relating to
customer data and privacy protection as
well as IT controls and resilience,
including the GDPR and the impact of
the recent Court of Justice of the EU
(CJEU) decision (known as Schrems II),
in which the CJEU ruled that Privacy
Shield (an EU/US data transfer
mechanism) is now invalid, leading to
more onerous due diligence
requirements for the Group prior to
sending personal data of its EU
customers and employees to non-EEA
countries, including the UK and the US;
and
NatWest Group Annual Report and Accounts 2020
359
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
•
the introduction of, and changes to,
taxes, levies or fees applicable to
NatWest Group’s operations, such as
the imposition of a financial transaction
tax, changes in tax rates, changes in
the scope and administration of the
Bank Levy, increases in the bank
corporation tax surcharge in the UK,
restrictions on the tax deductibility of
interest payments or further restrictions
imposed on the treatment of carry-
forward tax losses that reduce the value
of deferred tax assets and require
increased payments of tax.
These and other recent regulatory changes,
proposed or future developments and
heightened levels of public and regulatory
scrutiny in the UK, the EU and the US have
resulted in increased capital, funding and
liquidity requirements, changes in the
competitive landscape, changes in other
regulatory requirements and increased
operating costs, and have impacted, and will
continue to impact, product offerings and
business models. Any of these developments
(including any failure to comply with new rules
and regulations) could also have a significant
impact on NatWest Group’s authorisations
and licences, the products and services that
NatWest Group may offer, its reputation and
the value of its assets, NatWest Group’s
operations or legal entity structure, and the
manner in which NatWest Group conducts its
business, Material consequences could arise
should NatWest Group be found to be non-
compliant with these regulatory requirements.
Regulatory developments may also result in
an increased number of regulatory
investigations and proceedings and have
increased the risks relating to NatWest
Group’s ability to comply with the applicable
body of rules and regulations in the manner
and within the time frames required.
In 2019, the PRA published an industry-wide
‘Dear CEO’ letter which confirmed the
regulator’s ongoing focus on the integrity of
regulatory reporting and its intention to ask a
selection of UK banks to commission reports
from Skilled Persons under section 166 of the
Financial Services and Markets Act 2000 to
review the governance, controls and
processes around the preparation of Common
Reporting (‘COREP’) regulatory returns and to
provide reasonable assurance opinions on
whether the returns reviewed were properly
prepared. NatWest Group was selected to
participate in this review. The PRA delayed
the start of this review in light of the COVID-
19 pandemic and the Skilled Persons are now
expected to complete their work in H1 2021.
Changes in laws, rules or regulations, or in
their interpretation or enforcement, or the
implementation of new laws, rules or
regulations, including contradictory or
conflicting laws, rules or regulations by key
regulators or policymakers in different
jurisdictions, or failure by NatWest Group to
comply with such laws, rules and regulations,
may adversely affect NatWest Group’s
business, results of operations and outlook. In
addition, uncertainty and insufficient
international regulatory coordination as
enhanced supervisory standards are
developed and implemented may adversely
affect NatWest Group’s ability to engage in
effective business, risk and capital
management planning.
NatWest Group is subject to various
litigation matters, regulatory and
governmental actions and investigations
as well as remedial undertakings,
including conduct-related reviews, anti-
money laundering and redress projects,
the outcomes of which are inherently
difficult to predict, and which could have
an adverse effect on NatWest Group.
NatWest Group’s operations are diverse and
complex and it operates in legal and
regulatory environments that expose it to
potentially significant legal proceedings, and
civil and criminal regulatory and governmental
actions. NatWest Group has settled a number
of legal and regulatory actions over the past
several years but continues to be, and may in
the future be, involved in such actions in the
US, the UK, Europe and other jurisdictions.
NatWest Group is currently involved in a
number of significant legal and regulatory
actions, including criminal and civil
investigations, proceedings and ongoing
reviews (both formal and informal) by
governmental law enforcement and other
agencies and litigation proceedings, relating
to, among other matters, the offering of
securities, conduct in the foreign exchange
market, the setting of benchmark rates such
as LIBOR and related derivatives trading, the
issuance, underwriting, and sales and trading
of fixed-income securities (including
government securities), product mis-selling,
investment advice, customer mistreatment,
anti-money laundering, antitrust, VAT
recovery and various other compliance
issues. Legal and regulatory actions are
subject to many uncertainties, and their
outcomes, including the timing, amount of
fines or settlements or the form of any
settlements, which may be material and in
excess of any related provisions, are often
difficult to predict, particularly in the early
stages of a case or investigation. NatWest
Group’s expectation for resolution may
change and substantial additional provisions
and costs may be recognised in respect of
any matter.
Significant legal and regulatory actions to
which NatWest Group is currently exposed
include, but are not limited to, the following:
• An FCA investigation into the potential
criminal and civil culpability of NatWest
Group under the UK Money Laundering
Regulations 2007 in relation to certain
money service businesses and related
parties.
• Two Skilled Person reviews under
section 166 of the Financial Services
and Markets Act 2000 in relation to (i)
the governance arrangements with
respect to two financial crime change
programmes and (ii) a past business
review of investment advice provided
during 2010 to 2015.
• A review in the ROI involving Ulster
Bank Ireland DAC in relation to the
treatment of customers who were sold
mortgages with a tracker interest rate or
with a tracker interest rate entitlement.
• A criminal investigation by the United
States Attorney for the District of
Connecticut (USAO) and the United
States Department of Justice (DoJ)
concerning trading by certain NWM Plc
former traders involving alleged
spoofing, which activity occurred during
the term of a non-prosecution
agreement (NPA) that NWMSI entered
into in connection with secondary
trading in various forms of asset-backed
securities, under which non-prosecution
was conditioned on NWMSI and
affiliated companies not engaging in
conduct during the NPA that the USAO
determines was a felony under federal
or state law or a violation of the
antifraud provisions of the United States
securities law. The duration and
outcome of this criminal investigation,
which may include the extension,
modification, or deemed violation of the
NPA, remain uncertain.
For additional information relating to these
and other legal and regulatory proceedings
and matters to which NatWest Group is
currently exposed, see ‘Litigation and
regulatory matters’ of Note 26 to the
consolidated accounts.
Adverse outcomes or resolution of current or
future legal or regulatory actions (in particular,
any finding of criminal liability by US
authorities (including as a result of pleading
guilty), as to the alleged spoofing or the
conduct underlying the NPA) could have
material collateral consequences for NatWest
Group’s business and result in restrictions or
limitations on NatWest Group’s operations.
These may include consequences resulting
from the need to reapply for various important
licenses or obtain waivers to conduct certain
existing activities of NatWest Group,
particularly but not solely in the US, which
may take a significant period of time and the
results of which are uncertain. Failure to
obtain such licenses or waivers could
adversely impact NatWest Group’s business,
in particular in the US, including if it results in
NatWest Group being precluded from carrying
out certain activities. This in turn and/or the
fines, settlement payments or penalties could
adversely impact NatWest Group’s capital
position or its ability to meet regulatory capital
adequacy requirements.
Failure to comply with undertakings made by
NatWest Group to its regulators may result in
additional measures or penalties being taken
against NatWest Group. In addition, any
failure to administer conduct redress
processes adequately, or to handle individual
complaints fairly or appropriately, could result
in further claims as well as the imposition of
additional measures or limitations on NatWest
Group’s operations, additional supervision by
NatWest Group’s regulators, and loss of
investor confidence.
NatWest Group Annual Report and Accounts 2020
360
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
NatWest Group may not effectively
manage the transition of LIBOR and other
IBOR rates to alternative risk free rates.
UK and international regulators are driving the
transition from the use of interbank offer rates
(IBORs), including LIBOR, to alternative risk
free rates (RFRs). Interest rate benchmark
reform is a key priority of the Financial
Stability Board, and working groups have
been established in a number of jurisdictions
to support the transition. Major central banks
and regulators including the FCA, the Bank of
England, and the Federal Reserve, have
strongly urged market participants to transition
to RFRs, given the FCA have indicated that
the availability of LIBOR beyond the end of
2021 cannot be guaranteed. NatWest Group
has a significant exposure to IBORs, and
continues to reference it in certain products,
primarily derivatives and cash products.
NatWest Group has started to phase out its
use of IBOR in line with the Bank of England
transition roadmap, and has embedded
appropriate fall-back mechanisms in most
new IBOR activities, either through bilateral
contract documentation, or under the ISDA
fall-backs protocol. Major NWG entities
including NWB and NWM, along with many
group counterparties, have already adhered to
the ISDA IBOR fall-backs supplement and
protocol which establishes a clear, industry
accepted, contractual process to manage the
transition from IBORs to RFRs for derivative
products.
NatWest Group is actively engaged with
customers and industry working groups to
manage the risks relating to this exposure,
and explore ways to transition IBOR
exposures to RFRs to the extent possible.
Any economic impacts will be dependent on,
inter alia, the establishment of deep and liquid
RFR markets, the establishment of clear and
consistent market conventions for all
replacement products, as well as
counterparties’ willingness to accept, and
transition to, these conventions. Furthermore,
certain IBOR obligations may not be able to
be changed thus resulting in fundamentally
different economic outcomes than originally
intended. The uncertainties around the timing
and manner of transition to RFRs expose
NatWest Group, its clients and the financial
services industry more widely to risk.
Examples of these risks may include (i) legal
risks relating to documentation for new and
the majority of existing transactions (including,
but not limited to, changes, lack of changes,
or unclear contractual provisions); (ii) financial
risks from any changes in valuation of
financial instruments linked to impacted
IBORs that may impact NatWest Group’s
performance, including its cost of funds, and
its risk management related financial models;
(iii) pricing, interest rate or settlement risks
such as changes to benchmark rates that
could impact pricing, interest rate or
settlement mechanisms in or on certain
instruments; (iv) operational risks due to the
requirement to adapt IT systems, trade
reporting infrastructure and operational
processes; and (v) conduct and litigation risks
arising from communication regarding the
NatWest Group Annual Report and Accounts 2020
potential impact on customers, and
engagement with customers during the
transition period, or non-acceptance by
customers of replacement rates.
on NatWest Group and could, in aggregate,
adversely impact NatWest Group’s
competitive position, product offering and
revenues.
It is therefore difficult to determine to what
extent the changes will affect NatWest Group,
or the costs of implementing any relevant
remedial action. Uncertainty as to the nature
and extent of such potential changes, the take
up of alternative reference rates, or other
reforms including the potential continuation of
the publication of LIBOR, may adversely
affect financial instruments using LIBOR as
benchmarks. The implementation of any
alternative RFRs may be impossible or
impracticable under the existing terms of
certain financial instruments and could have
an adverse effect on the value of, return on,
and trading market for, certain financial
instruments and on NatWest Group’s
profitability. There is also the risk of an
adverse effect to reported performance arising
from the transition rules established by
accounting bodies, as the outcome of certain
rules (as approved by the IASB) are still
dependent on how the actual transition
process is implemented.
NatWest Group operates in jurisdictions
that are subject to intense scrutiny by the
competition authorities.
There is significant oversight by competition
authorities of the jurisdictions, which NatWest
Group operates in. The competitive landscape
for banks and other financial institutions in the
UK, the EU/EEA and the US is rapidly
changing. Recent regulatory and legal
changes have and may continue to result in
new market participants and changed
competitive dynamics in certain key areas,
such as in retail and SME banking in the UK
where the introduction of new entrants is
being actively encouraged by the government.
Competition authorities, including the CMA,
are currently also looking at and focusing
more on how they can support competition
and innovation in digital markets.
The UK retail banking sector has been, and
remains, subjected to intense scrutiny by the
UK competition authorities, government and
by other bodies, including the FCA and the
Financial Ombudsman Service, in recent
years, including with a number of
reviews/inquiries being carried out, including
market reviews conducted by the CMA and its
predecessor the Office of Fair Trading
regarding SME banking and personal banking
products and services, the Independent
Commission on Banking and the
Parliamentary Commission on Banking
Standards.
These reviews raised significant concerns
about the effectiveness of competition in the
retail banking sector. The CMA’s Retail
Banking Market Order 2017 imposes
remedies primarily intended to make it easier
for consumers and businesses to compare
personal current account (‘PCA’) and SME
bank products, increase the transparency of
price comparison between banks and amend
PCA overdraft charging. These remedies
impose additional compliance requirements
361
Adverse findings resulting from current or
future competition investigations may result in
the imposition of reforms or remedies, which
may impact the competitive landscape in
which NatWest Group operates or result in
restrictions on mergers and consolidations
within the financial sector.
The cost of implementing the Alternative
Remedies Package (‘ARP’) could be more
onerous than anticipated.
Implementing the ARP (initially in relation to
the business previously described as Williams
& Glyn, since supplemented by an additional
perimeter of 200,000 customers since 25
August 2020) has involved costs for NatWest
Group, including but not limited to funding
commitments of £425 million for the Capability
and Innovation Fund and £350 million for the
Incentivised Switching Scheme, both being
administered by the Independent Body.
Implementing the ARP may:
•
involve additional costs for NatWest
Group;
• divert resources from NatWest Group’s
•
•
•
operations;
cause business disruption and jeopardise
the delivery of other significant plans and
initiatives;
require NatWest Group to modify certain
aspects of its execution of the Incentivised
Switching Scheme, which could increase
implementation costs; and
subject NatWest Group to penalties of up
to £50 million if uptake within the scheme
is insufficient.
As a direct consequence of the ARP, NatWest
Group will lose existing customers and
deposits, which in turn will have adverse
impacts on its business and associated
revenues and margins. The ARP could also
result in adverse customer engagement and
adverse reputational implications for NatWest
Group.
The ARP is intended to benefit eligible
competitors and negatively impact NatWest
Group’s competitive position.
Upon request by an eligible bank NatWest
Group has agreed to grant customers which
have switched to eligible banks under the
scheme access to its branch network for cash
and cheque handling services. This may
impact customer service for NatWest Group’s
own customers with consequent competitive,
financial and reputational implications.
Implementation of the scheme is also
dependent on the engagement of eligible
banks and administration by the Independent
Body.
The COVID-19 pandemic may adversely
affect customer switching. The incentivised
transfer of SME customers to third party
banks places reliance on those third parties to
achieve satisfactory customer outcomes,
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Risk factors
which could give rise to reputational damage
to NatWest Group if these are not
forthcoming.
Failure to comply with the terms of the ARP
could result in the imposition of additional
measures or limitations on NatWest Group’s
operations, additional supervision by NatWest
Group’s regulators, and loss of investor
confidence.
Changes in tax legislation or failure to
generate future taxable profits may impact
the recoverability of certain deferred tax
assets recognised by NatWest Group.
In accordance with the accounting policies set
out on page 267, NatWest Group has
recognised deferred tax assets on losses
available to relieve future profits from tax only
to the extent it is probable that they will be
recovered. The deferred tax assets are
quantified on the basis of current tax
legislation and accounting standards and are
subject to change in respect of the future
rates of tax or the rules for computing taxable
profits and offsetting allowable losses.
Failure to generate sufficient future taxable
profits or further changes in tax legislation
(including with respect to rates of tax) or
accounting standards may reduce the
recoverable amount of the recognised tax loss
deferred tax assets, amounting to £0.9 billion
as at 31 December 2020. Changes to the
treatment of certain deferred tax assets may
impact NatWest Group’s capital position. In
addition, NatWest Group’s interpretation or
application of relevant tax laws may differ
from those of the relevant tax authorities and
provisions are made for potential tax liabilities
that may arise on the basis of the amounts
expected to be paid to tax authorities. The
amounts ultimately paid may differ materially
from the amounts provided depending on the
ultimate resolution of such matters.
NatWest Group Annual Report and Accounts 2020
362
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Material contracts
The company and its subsidiaries are party to
various contracts in the ordinary course of
business. Material contracts include the
following:
B Share Acquisition and Contingent Capital
Agreement
On 26 November 2009, the company and HM
Treasury entered into the Acquisition and
Contingent Capital Agreement pursuant to
which HM Treasury subscribed for the initial B
shares and the Dividend Access Share (the
Acquisitions) and agreed the terms of HM
Treasury's contingent subscription (the
Contingent Subscription) for an additional £8
billion in aggregate in the form of further B
shares (the Contingent B shares), to be
issued on the same terms as the initial B
shares. The Acquisitions were subject to the
satisfaction of various conditions, including
the company having obtained the approval of
its shareholders in relation to the Acquisitions.
On 16 December 2013, the company
announced that, having received approval
from the PRA, it had terminated the £8 billion
Contingent Subscription. The company was
able to cancel the Contingent Subscription as
a result of the actions announced in the
second half of 2013 to further strengthen its
capital position.
On 9 October 2015, the company announced
that on 8 October 2015, it had received a valid
conversion notice from HM Treasury in
respect of all outstanding B shares held by
HM Treasury. The new ordinary shares issued
on conversion of the B shares were admitted
to the official list of the UK Listing Authority
(UKLA), and to trading on the London Stock
Exchange plc, on 14 October 2015. Following
such conversion, HM Treasury no longer
holds any B shares.
The company gave certain representations
and warranties to HM Treasury on the date of
the Acquisition and Contingent Capital
Agreement, on the date the circular was
posted to shareholders, on the first date on
which all of the conditions precedent were
satisfied, or waived, and on the date of the
Acquisitions. The company also agreed to a
number of undertakings.
The company agreed to reimburse HM
Treasury for its expenses incurred in
connection with the Acquisitions.
For as long as it is a substantial shareholder
of the company (within the meaning of the
UKLA’s Listing Rules), HM Treasury has
undertaken not to vote on related party
transaction resolutions at general meetings
and to direct that its affiliates do not so vote.
Directed Buyback Contract
On 7 February 2019, the company and HM
Treasury entered into the Directed Buyback
Contract to help facilitate the return of the
company to full private ownership through the
use of any excess capital to buy back the
company’s ordinary shares held by HM
Treasury.
Under the terms of the Directed Buyback
Contract, the company may agree with HM
Treasury to make off-market purchases from
time to time of its ordinary shares held by HM
Treasury, including by way of one or more
standalone purchases, through a non-
discretionary, broker-managed directed
trading programme, or in conjunction with any
offer or sale by HM Treasury by way of an
institutional placing. Neither the company nor
HM Treasury would be under an obligation to
agree to make such off-market purchases and
would only do so subject to regulatory
approval at the time.
The aggregate number of ordinary shares
which the company may purchase from HM
Treasury under the Directed Buyback
Contract will not exceed 4.99%. of the
company’s issued share capital and the
aggregate consideration to be paid will not
exceed 4.99%. of the company’s market
capitalisation. The price to be paid for each
ordinary share will be the market price at the
time of purchase or, if the directed buyback is
in conjunction with an institutional placing, the
placing price.
Framework and State Aid Deed
As a result of the State Aid granted to the
company, it was required to work with HM
Treasury to submit a State Aid restructuring
plan to the European Commission (EC), which
was then approved by the EC under the State
Aid rules on 14 December 2009. The
company agreed a series of measures which
supplemented the measures in the company’s
strategic plan.
The company entered into a State Aid
Commitment Deed with HM Treasury at the
time of the initial EC decision and, following
the EC’s approval of amendments to the
restructuring plan in April 2014, the company
entered into a revised State Aid Commitment
Deed with HM Treasury. In September 2017,
the revised State Aid Commitment Deed was
amended by a Deed of Variation (as so
amended, the “Revised State Aid
Commitment Deed”) following the EC’s
approval of an alternative remedies package
(the “Alternative Remedies Package”) to
replace the company’s final outstanding
commitment under its State Aid obligations (to
divest the business previously known as
Williams & Glyn).
On 25 April 2018, the Revised State Aid
Commitment Deed was replaced by the
Framework and State Aid Deed between the
company, HM Treasury and an independent
body established to facilitate and oversee the
delivery of the Alternative Remedies Package
(the “Independent Body”). Under the
Framework and State Aid Deed, the company
agrees to do all acts and things necessary to
ensure that HM Treasury is able to comply
with its obligations under any EC decision
approving State Aid to the company, including
under the Alternative Remedies Package.
Pursuant to the Framework and State Aid
Deed, the company has committed: (i) £425
million into a fund for eligible bodies in the UK
banking and financial technology sectors to
develop and improve their capability to
compete with the company in the provision of
banking services to small and medium-sized
enterprises (“SMEs”) and develop and
improve the financial products and services
available to SMEs (the “Capability and
Innovation Fund”); and (ii) £275 million to
eligible bodies to help them incentivise SME
banking customers within the division of the
company previously known as Williams &
Glyn to switch their business current accounts
and loans to the eligible bodies (the
“Incentivised Switching Scheme”). The
company has also agreed to set aside up to a
further £75 million in funding to cover certain
costs customers may incur as a result of
switching under the Incentivised Switching
Scheme. In addition, under the terms of the
Alternative Remedies Package, should the
uptake within the Incentivised Switching
Scheme not be sufficient, the company may
be required to make a further contribution,
capped at £50 million. The Independent Body
will distribute funds from the Capability and
Innovation Fund and implement the
Incentivised Switching Scheme.
Under the Framework and State Aid Deed,
the company also agreed to indemnify the
Independent Body and HM Treasury, up to an
amount of £320 million collectively to cover
liabilities that may be incurred in implementing
the Alternative Remedies Package. The
provisions of the indemnity to the Independent
Body are set out in the Framework and State
Aid Deed and the provisions of the indemnity
to HM Treasury are set out in a separate
agreement between the company and HM
Treasury, described under “Deed of
Indemnity” below.
The Framework and State Aid Deed also
provides that if the EC adopts a decision that
the UK Government must recover any State
Aid (a "Repayment Decision") and the
recovery order of the Repayment Decision
has not been annulled or suspended by the
General Court or the European Court of
Justice, then the company must repay HM
Treasury any aid ordered to be recovered
under the Repayment Decision.
Deed of Indemnity
In the context of the Framework and State Aid
Deed, the company entered into a Deed of
Indemnity with HM Treasury on 25 April 2018,
pursuant to which the company agreed to
indemnify HM Treasury to cover liabilities that
may be incurred in implementing the
Alternative Remedies Package, as described
under “Framework and State Aid Deed”
above.
Trust Deed
In the context of the Framework and State Aid
Deed, the company entered into a Trust Deed
with the Independent Body on 25 April 2018,
to set up a trust to administer the funds
committed by the company under the
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
NatWest Group Annual Report and Accounts 2020
363
Material contracts
Framework and State Aid Deed for the
Alternative Remedies Package.
State Aid Costs Reimbursement Deed
Under the 2009 State Aid Costs
Reimbursement Deed, the company has
agreed to reimburse HM Treasury for fees,
costs and expenses associated with the State
Aid and State Aid approval.
HMT and UKFI Relationship Deed
On 7 November 2014, in order to comply with
an amendment to the UK Listing Rules, the
company entered into a Relationship Deed
with HM Treasury and UK Financial
Investments Limited in relation to the
company’s obligations under the UK Listing
Rules to put in place an agreement with any
controlling shareholder (as defined for these
purposes in the Listing Rules). The
Relationship Deed covers the three
independence provisions mandated by the
Listing Rules: (i) that contracts between the
company and HM Treasury (or any of its
subsidiaries) will be arm's length and normal
commercial arrangements, (ii) that neither HM
Treasury nor any of its associates will take
any action that would have the effect of
preventing the company from complying with
its obligations under the Listing Rules; and (iii)
neither HM Treasury nor any of its associates
will propose or procure the proposal of a
shareholder resolution which is intended or
appears to be intended to circumvent the
proper application of the Listing Rules.
Memorandum of Understanding Relating to
The Royal Bank of Scotland Group Pension
Fund
On 16 April 2018 the company entered into a
Memorandum of Understanding (the ”MoU”)
with the trustee of The Royal Bank of
Scotland Group Pension Fund (the ”Group
Fund”), which aimed to facilitate both the
necessary changes to the Main Section of the
Group Fund to align the employing entity
structure with the requirements of the UK ring-
fencing legislation and acceleration of the
settlement framework for the 31
December 2017 triennial valuation of the Main
Section of the Group Fund (brought forward
from 31 December 2018).
In addition, the MoU also provided clarity on
the additional related funding contributions
required to be made by the company to the
Main Section of the Group Fund as follows:
(i) a pre-tax payment of £2 billion that was
made in the second half of 2018 and (ii) from
1 January 2020, further pre-tax contributions
of up to £1.5 billion in aggregate linked to the
making of future distributions to RBS
shareholders including ordinary and special
dividends and/or share buy backs (subject to
an annual cap on contributions of £500 million
before tax).
On 28 September 2018, the implementation of
the MoU was documented through a
Framework Agreement entered into between
the company and the trustee of the Group
Fund.
NatWest Group Annual Report and Accounts 2020
364
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Shareholder information
Financial calendar
Shareholder enquiries
Analysis of ordinary shareholders
Important addresses
Principal offices
Forward-looking statements
Page
365
365
366
366
366
367
Ex-dividend date
Cumulative preference shares 29 April and 2 December 2021
Ordinary shares (2020 final)
25 March 2021
Record date
Cumulative preference shares
30 April and 3 December 2021
Financial calendar
Dividends
Payment dates
Cumulative preference shares 28 May and 31 December 2021
Ordinary shares (2020 final)
26 March 2021
Annual General Meeting
28 April 2021
Non-cumulative preference
shares
31 March, 30 June
30 September and
31 December 2021
4 May 2021
Ordinary shares (2020 final)
Shareholder enquiries
You can check your shareholdings in the company by visiting the
Shareholder Hub section of our website at natwestgroup.com and
clicking the ‘Access your shareholding online’ tab. You will need the
shareholder reference number printed on your share certificate or
dividend confirmation statement to access this information. You can
also view any outstanding payments, update bank account and
address details and download various forms.
NatWest Group is committed to reducing its impact on the
environment. You can choose to receive your shareholder
communications electronically via the ‘Sign up for e-comms’ tab and
you will receive an email notification when documents become
available to view on our website.
You can also check your shareholding by contacting our Registrar:
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: +44 (0)370 702 0135
Fax: +44 (0)370 703 6009
Website: www-uk.computershare.com/investor/contactus
Braille and audio Strategic report with additional information
Shareholders requiring a Braille or audio version of the Strategic report
with additional information should contact the Registrar
on +44 (0)370 702 0135.
ShareGift
The company is aware that shareholders who hold a small number of
shares may be retaining these shares because dealing costs make it
uneconomical to dispose of them. ShareGift is a free charity share
donation service operated by The Orr Mackintosh Foundation
(registered charity 1052686) to enable shareholders to donate shares
to charity.
Interim results
30 July 2021
shares, often pressuring investors to make a quick decision or miss
out on the deal. Contact can also be in the form of email, post or word
of mouth. Scams are sometimes advertised in newspapers, magazines
or online as genuine investment opportunities and may offer free gifts
or discounts on dealing charges.
Scammers will request money upfront, as a bond or other form of
security, but victims are often left out of pocket, sometimes losing their
savings or even their family home. Even seasoned investors have
been caught out by scams.
Clone firms
A ‘clone firm’ uses the name, firm registration number (FRN) and
address of a firm or individual who is FCA authorised. The scammer
may claim that the genuine firm's contact details on the FCA Register
(Register) are out of date and then use their own details, or copy the
website of an authorised firm, making subtle changes such as the
phone number. They may claim to be an overseas firm, which won’t
always have full contact and website details listed on the Register.
How to protect yourself
Always be wary if you’re contacted out of the blue, pressured to invest
quickly, or promised returns that sound too good to be true. FCA
authorised firms are unlikely to contact you unexpectedly with an offer
to buy or sell shares or bonds.
Please do not give any personal details to any caller unless you are
certain that they are genuine. Check the Register to ensure the firm
contacting you is authorised and also check the FCA’s Warning List of
firms to avoid at www.fca.org.uk/scamsmart.
Ask for their (FRN) and contact details and then contact them using
the telephone number on the Register. Never use a link in an email or
website from the firm offering you an investment.
It is strongly advised that you seek independent professional advice
before making any investment.
If you are a UK taxpayer, donating your shares in this way will not give
rise to either a gain or a loss for UK capital gains tax purposes. You
may be able to claim UK income tax relief on gifted shares and can do
so in various ways. Further information can be obtained from HM
Revenue & Customs.
Report a scam
If you suspect that you have been approached by fraudsters, or have
any concerns about a potential scam, report this to the FCA by
contacting their Consumer Helpline on 0800 111 6768 or by using their
reporting form which can be found on their website.
Should you wish to donate your shares to charity please contact
ShareGift for further information:
ShareGift, The Orr Mackintosh Foundation
4th Floor Rear, 67/68 Jermyn Street, London SW1Y 6NY
Telephone: +44 (0)20 7930 3737
Website: www.sharegift.org
If you have already invested in a scam, fraudsters are likely to target
you again or sell your details to other criminals. The follow-up scam
may be completely separate, or may be related to the previous scam
in the form of an offer to get your money back or buy back the
investment on payment of a fee.
Find out more at www.fca.org.uk/consumers
Share and bond scams
Share and bond scams are often run from ‘boiler rooms’ where
fraudsters cold-call investors, offering them worthless, overpriced or
even non-existent shares or bonds.They use increasingly
sophisticated tactics to approach investors, offering to buy or sell
NatWest Group Annual Report and Accounts 2020
365
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Shareholder information
Analysis of ordinary shareholders
At 31 December 2020
Individuals
Banks and nominee companies
Investment trusts
Insurance companies
Other companies
Pension trusts
Other corporate bodies
Range of shareholdings:
1 - 1,000
1,001 - 10,000
10,001 - 100,000
100,001 - 1,000,000
1,000,001 - 10,000,000
10,000,001 and over
Important addresses
Shareholder enquiries
Registrar
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: +44 (0)370 702 0135
Facsimile: +44 (0)370 703 6009
Website: www-uk.computershare.com/investor/contactus
ADR Depositary Bank
BNY Mellon Shareowner Services
PO Box 505000
Louisville, KY 40233-5000
Direct Mailing for overnight packages:
BNY Mellon Shareowner Services
462 South 4th Street
Suite 1600
Louisville KY 40202
Telephone: 1-888-269-2377 (US callers – toll free)
Telephone: +1 201 680 6825 (International)
Email: shrrelations@cpushareownerservices.com
Website: www.mybnymdr.com
Corporate, Governance
NatWest Group plc
PO Box 1000, Gogarburn
Edinburgh, EH12 1HQ
Telephone: 0131 556 8555
Investor Relations
250 Bishopsgate, London
EC2M 4AA, England
Telephone: +44 (0)207 672 1758
Facsimile: +44 (0)207 672 1801
Email: investor.relations@natwest.com
Registered office
36 St Andrew Square
Edinburgh, EH2 2YB
Telephone: 0131 556 8555
Registered in Scotland No. SC45551
Website
www.natwestgroup.com
Shareholdings
175,501
4,531
40
3
445
20
70
180,610
155,790
23,073
979
466
226
76
180,610
Number
of shares
- millions
101,783,482
11,969,268,979
385,295
417,909
29,888,066
33,956
27,387,790
12,129,165,477
37,742,402
53,203,748
28,169,088
163,187,042
780,066,052
11,066,797,145
12,129,165,477
%
0.84
98.68
—
—
0.25
—
0.23
100.00
0.31
0.44
0.23
1.35
6.43
91.24
100.00
Principal offices
NatWest Group plc
PO Box 1000, Gogarburn
Edinburgh, EH12 1HQ
NatWest Markets Plc
250 Bishopsgate, London
EC2M 4AA, England
The Royal Bank of Scotland plc
PO Box 1000, Gogarburn
Edinburgh, EH12 1HQ
250 Bishopsgate, London
EC2M 4AA, England
National Westminster Bank Plc
250 Bishopsgate, London
EC2M 4AA, England
Ulster Bank Limited
11-16 Donegall Square East, Belfast,
Co Antrim, BT1 5UB
Northern Ireland
Ulster Bank Ireland DAC
Ulster Bank Group Centre, George's Quay,
Dublin 2, D02 VR98
NatWest Markets Group Holdings Corp.
251, Little Falls Drive, Wilmington
Delaware, 19808
Coutts & Company
440 Strand, London
WC2R 0QS, England
The Royal Bank of Scotland International Limited
Royal Bank House, 71 Bath Street
St Helier, JE4 8PJ
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
NatWest Group Annual Report and Accounts 2020
366
Forward looking statements
Cautionary statement regarding forward-looking statements
Certain sections in this document contain ‘forward-looking statements’ as that
term is defined in the United States Private Securities Litigation Reform Act of
1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’,
‘anticipate’, ‘commit’, ‘believe’, ‘should’, ‘intend’, ‘will’, ‘plan’, ‘could’, ‘probability’,
‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘may’, ‘endeavour’,
‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on these
expressions. In particular, this document includes forward-looking statements
relating, but not limited to: the COVID-19 pandemic and its impact on NatWest
Group; future profitability and performance, including financial performance
targets (such as RoTE) and discretionary capital distribution targets; ESG and
climate-related targets, including in relation to sustainable financing and financed
emissions; planned cost savings; implementation of NatWest Group’s Purpose-
led strategy, including in relation to the refocusing of its NWM franchise and the
digitalisation of its operations and services; the timing and outcome of litigation
and government and regulatory investigations; the implementation of the
Alternative Remedies Package; balance sheet reduction, including the reduction
of RWAs; capital, liquidity and leverage ratios and requirements, including CET1
Ratio, RWAes, Pillar 2 and other regulatory buffer requirements and MREL;
funding plans and credit risk profile; capitalisation; portfolios; net interest margin;
customer loan and income growth and market share; impairments and write-
downs, including with respect to goodwill; restructuring and remediation costs
and charges; NatWest Group’s exposure to political risk, economic risk, climate,
environmental and sustainability risk, operational risk, conduct risk, cyber and IT
risk and credit rating risk and to various types of market risks, including interest
rate risk, foreign exchange rate risk and commodity and equity price risk;
customer experience, including our Net Promotor Score (NPS); employee
engagement and gender balance in leadership positions.
Limitations inherent to forward-looking statements
These statements are based on current plans, expectations, estimates, targets
and projections, and are subject to significant inherent risks, uncertainties and
other factors, both external and relating to NatWest Group’s strategy or
operations, which may result in NatWest Group being unable to achieve the
current plans, expectations, estimates, targets, projections and other anticipated
outcomes expressed or implied by such forward-looking statements. In addition,
certain of these disclosures are dependent on choices relying on key model
characteristics and assumptions and are subject to various limitations, including
assumptions and estimates made by management. By their nature, certain of
these disclosures are only estimates and, as a result, actual future results, gains
or losses could differ materially from those that have been estimated.
Accordingly, undue reliance should not be placed on these statements. The
forward-looking statements contained in this document speak only as of the date
we make them and we expressly disclaim any obligation or undertaking to
update or revise any forward-looking statements contained herein, whether to
reflect any change in our expectations with regard thereto, any change in events,
conditions or circumstances on which any such statement is based, or otherwise,
except to the extent legally required.
Important factors that could affect the actual outcome of the forward-looking
statements
We caution you that a large number of important factors could adversely affect
our results or our ability to implement our strategy, cause us to fail to meet our
targets, predictions, expectations and other anticipated outcomes or affect the
accuracy of forward-looking statements described in this document. These
factors include, but are not limited to, those set forth in the risk factors and the
other uncertainties described in NatWest Group plc’s Annual Report on Form 20-
F and its other filings with the US Securities and Exchange Commission.
The principal risks and uncertainties that could adversely NatWest Group’s
future results, its financial condition and prospects and cause them to be
materially different from what is forecast or expected, include, but are not limited
to: risks relating to the COVID-19 pandemic (including in respect of: the effects
on the global economy and financial markets, and NatWest Group’s customers;
increased counterparty risk; NatWest Group’s ability to meet its targets and
strategic objectives; increased operational and control risks; increased funding
risk; future impairments and write-downs); economic and political risk (including
in respect of: uncertainty regarding the effects of Brexit; increased political and
economic risks and uncertainty in the UK and global markets; changes in interest
rates and foreign currency exchange rates; and HM Treasury’s ownership of
NatWest Group plc); strategic risk (including in respect of the implementation of
NatWest Group’s Purpose-led Strategy, including the re-focusing of the NWM
franchise and NatWest Group’s ability to achieve its targets); financial resilience
risk (including in respect of: NatWest Group’s ability to meet targets and to
resume discretionary capital distributions; the competitive environment;
counterparty risk; prudential regulatory requirements for capital and MREL;
funding risk; changes in the credit ratings; the adequacy of NatWest Group’s
resolution plans; the requirements of regulatory stress tests; model risk;
sensitivity to accounting policies, judgments, assumptions and estimates;
changes in applicable accounting standards; the value or effectiveness of credit
protection; and the application of UK statutory stabilisation or resolution powers);
climate and sustainability risk (including in respect of: risks relating to climate
change and the transitioning to a low carbon economy; the implementation of
NatWest Group’s climate change strategy and climate change resilient systems,
controls and procedures; increased model risk; the failure to adapt to emerging
climate, environmental and sustainability risks and opportunities; changes in
ESG ratings; increasing levels of climate, environmental and sustainability
related regulation and oversight; and climate, environmental and sustainability
related litigation, enforcement proceedings and investigations); operational and
IT resilience risk (including in respect of: operational risks (including reliance on
third party suppliers); cyberattacks; the accuracy and effective use of data;
complex IT systems (including those that enable remote working); attracting,
retaining and developing senior management and skilled personnel; NatWest
Group’s risk management framework; and reputational risk); and legal,
regulatory and conduct risk (including in respect of: the impact of substantial
regulation and oversight; compliance with regulatory requirements; the outcome
of legal, regulatory and governmental actions and investigations; the
replacement of LIBOR, EURIBOR and other IBOR rates; heightened regulatory
and governmental scrutiny (including by competition authorities); implementation
of the Alternative Remedies Package; and changes in tax legislation or failure to
generate future taxable profits).
The information, statements and opinions contained in this document do not
constitute a public offer under any applicable legislation or an offer to sell or a
solicitation of an offer to buy any securities or financial instruments or any advice
or recommendation with respect to such securities or other financial instruments.
NatWest Group Annual Report and Accounts 2020
367
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n